By Alex Richardson
SINGAPORE, Feb 9 (Reuters) - Asian shares fell on Wednesday
after China's latest interest rate rise, but government bond
yields rose and the dollar and Swiss franc eased as investors
bet Beijing's policy tightening would not derail hopes of a
sustained economic recovery.
Developed equity markets outperformed emerging ones,
continuing a rotation of funds that has been in place since the
start of the year, although some analysts predicted strong Asian
growth would reverse the trend eventually.
U.S. S&P 500 futures fell 0.3 percent and financial
spreadbetters were calling major European markets to open
flat-to-lower. On Tuesday, the Dow Jones industrial average
notched a seventh straight day of gains, rising 0.6
percent, as surprisingly strong sales by McDonald's
boosted optimism about consumer spending.
Technical indicators show the average is overbought after a
strong run-up that began in September, leaving U.S. markets
prone to a pullback or a correction.
China raised interest rates by 25 basis points late on
Tuesday, its second increase in just over six weeks. The timing
was a surprise, coming on the final day of the Lunar New Year
holiday, but investors had been expecting further tightening
from Beijing to rein in stubbornly high inflation.
"Chinese policymakers' efforts to rein in overheating
pressures are now seen in a relatively more positive light by
global investors in that they will help slow growth to a more
sustainable pace, while other engines of growth in the region
begin to rev up," said Samarjit Shankar, analyst at BNY Mellon.
Japan's Nikkei hit a 9-month high before retreating
to close down 0.2 percent as bank shares were hit by
profit-taking, but Australia's benchmark index rose 0.3
percent and New Zealand shares also gained.
MSCI's index of Asia Pacific shares outside Japan
fell 0.8 percent, weighed down by a 1.2 percent
decline in South Korean stocks , with market players
citing weakness in firms such as Hyundai Motor that
are most exposed to China and a stronger won .
"The Chinese rate hike had been expected for some time,"
said Lee Sun-yeb, a market analyst at Shinhan Investment Corp in
Seoul. "However, investors are reacting to it by offloading
issues that are sensitive to forex swings and Chinese demand."
Chinese shares also fell, with the mainland market
down 1 percent and Hong Kong's Hang Seng off 0.6 percent.
Japan has been Asia's best performing market so far this
year as healthier corporate profits and worries about building
inflationary pressures have encouraged investors to switch money
from fast-growing emerging markets -- last year's star
performers -- to developed market equities.
"I expect developed markets to outperform for a few months
but Asia and emerging markets should come back with a vengeance
in the second-half of the year," said Khiem Do, chairman of the
Asia multi-asset team at Barings Asset Management in Hong Kong.
While monetary policy in the rich world remains
ultra-loose, central banks in emerging markets, especially in
Asia, have been tightening policy to rein in inflation fuelled
by rising commodity and energy prices and strong domestic
growth.
Indonesia raised rates last week and South Korea is expected
to announce a back-to-back rate increase on Friday, while
central banks in India and Brazil both hiked last month.
Traders said markets were positioned for more rate hikes in
China and Indonesia, but some others such as India and Korea are
beginning to look attractive from a fixed income perspective as
markets may be bracing for a lot more rate increases than what
may be ultimately delivered.
INFLATION STILL IN FOCUS
The Swiss franc , seen as a safe-haven currency, fell
across the board on Wednesday and the dollar index , which
measures the U.S. currency against a basket of major currencies,
slipped 0.1 percent.
Foreign exchange strategists said China's rate rise could
support Asian currencies by underscoring policymakers
determination to keep a lid on inflation.
"The recent moves by China will give more room for other
Asian countries to raise rates and regional equity markets will
react negatively to this," said Wilfred Sit, Head of Asia
Pacific Investment Strategy, Mirae Asset Global Investments (HK)
Limited. "Other more freely floating Asian currencies will
continue to appreciate."
Increased investor appetite for riskier assets was evident
in the bond market, with the five-year Japanese government bond
yield climbing to a 15-month high and 10-year U.S.
Treasury yields at a 9-month high, continuing a
global trend of rising yields on government debt on expectations
of an improving economy.
"The market seems to want to price in a rate hike by the
Federal Reserve," said a trader at a Japanese bank.
Gold , often seen as an inflation hedge, was little
changed around $1,363 an ounce, after rising around 1 percent in
the previous session.
U.S. crude oil futures rose 44 cents to $87.38 a barrel
after U.S. data showed an unexpected drawdown in stocks.
News of China's rate hike hit commodities markets in London
and New York initially, but prices soon rebounded as investors
felt the size of the increase was not enough to stifle China's
voracious demand for raw materials.
(Additional reporting by Vikram Subhedar, Jongwoo Cheon and
Saikat Chatterjee; Editing by Kim Coghill)
