Asia Stock rally fizzles as bonds gain; Dollar weakens 

• Dollar weakens while Treasuries halt a five-day slide

• MSCI All-Country World Index hit a record on Wednesday

The reflation trade rally that sent global equities soaring to the highest level on record was cut short during Asian hours as the yen jumped and Treasuries climbed for the first time in five days.

Stocks in Tokyo fell while the dollar slipped against most major currencies. Investors are questioning how much further equities can go after the MSCI All-Country World Index closed at an all-time high on Wednesday. Evidence of firming U.S. inflation had spurred bets that the economy can withstand higher interest rates as it waits for stimulus from the Trump administration. The yield on 10-year Treasuries retreated after reaching 2.50 percent on Wednesday.

World equities have jumped in value to more than $70 trillion after a rally since Donald Trump’s election that has been spurred by optimism for stronger U.S. economic growth. A technical indicator showed MSCI’s broadest measure of global equities might have become overbought, while a volatility gauge for the S&P 500 increased the most since January on Wednesday.

“Can equities sustain this rally from here?” Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd. “If the decline today in Japanese shares spill over to European shares and then to New York, things could get serious but we’ll have to see.”

Wednesday’s data lifted the odds for a Fed rate hike in March to 42 percent from 30 percent two days ago, helped by Fed chair Janet Yellen’s testimony that the central bank doesn’t need to wait for Trump to outline plans on fiscal stimulus before resuming rate hikes. U.S. year-on-year inflation reached 2.5 percent for January, the fastest pace since 2012.

Before Yellen’s testimony, traders had anticipated the Fed would start raising U.S. borrowing costs in June. Now they see one as early as May, according to futures data compiled by Bloomberg. Data this week also showed factory price increases accelerated in China.

What’s ahead for the markets:

• Next up for U.S. economic reports will be data on housing starts, due on Wednesday. U.S. home construction starts were probably little changed in January after a larger-than-projected advance a month earlier on increased apartment building, a Commerce Department report is forecast to show.
• The Group of 20 foreign ministers begin a two-day meeting as part of Germany’s rotating chairmanship. Rex Tillerson is expected to make his first European trip as secretary of state.

Here are the main moves in markets:

Stocks

• Japan’s Topix fell 0.3 percent at 1:28 p.m. in Tokyo, after fluctuating between gains and losses earlier in the day. Australia’s S&P/ASX 200 Index fell less than 0.1 percent. New Zealand’s S&P/NZX 50 Index dropped 1.1 percent from the highest level since October.
• Hong Kong’s Hang Seng climbed 0.4 percent to the highest level since September. The Hang Seng China Enterprises Index added 0.2 percent, reaching the highest since November 2015 with banks leading the way.
• Futures on the S&P 500 fell 0.1 percent after the benchmark index rose 0.5 percent and the MSCI All-Country World Index added 0.6 percent on Wednesday.

Currencies

• The yen rose 0.2 percent to 113.90 per dollar, after snapping a 0.9 percent decline on Wednesday.
• The Bloomberg Dollar Spot Index lost less than 0.1 percent after halting a four-day advance on Wednesday.
• The Aussie was little changed after climbing 0.6 percent on Wednesday. The unemployment rate unexpectedly fell in January, despite a plunge in full-time jobs, underscoring the mixed picture of the country’s labor market.

Bonds

• The yield on 10-year Treasuries dropped one basis point to 2.48 percent after increasing for a fifth day on Wednesday.
• Australian 10-year yields rose for a fifth straight session, adding two basis points to 2.81 percent.

Commodities

• Oil retreated 0.1 percent, trading near $53 a barrel after a government report showed U.S. crude inventories rose to the highest levels in weekly data going back to 1982.
• Gold climbed for a third day, gaining 0.1 percent to $1,234.84 an ounce.

Source: Bloomberg – Asia Stock Rally Fizzles as Bonds Gain, Yen Jumps: Markets Wrap

---