Asia stocks reach 5-week high, yuan makes big weekly gains

TOKYO — Asian stocks inched up to five-week highs on Friday,
after Chairman Jerome Powell reiterated the Federal Reserve
will be patient about raising interest rates and news that
trade talks between Washington and Beijing are moving to higher
levels.

As the Fed’s dovish stance kept a lid on the dollar, China’s
yuan rose to its highest levels in more than 5 months and was
on course for its biggest weekly gains since the 2005
revaluation in onshore trade.

MSCI’s broadest index of Asia-Pacific shares outside Japan
gained 0.2 percent to the highest levels since Dec. 6, while
Japan’s benchmark Nikkei advanced 0.7 percent. Shanghai
Composite Index initially rose 0.8 percent, but that was pared
to just 0.1 percent.

Wall Street extended its rally into a fifth straight day on
Thursday in a whipsaw trading session as investors responded to
mixed comments by Powell, while a warning from Macy’s pummeled
retail stocks.

At the Economic Club of Washington, Powell reiterated the views
of other policymakers that the Fed would be patient about
interest rate hikes.

Major US stock indexes also quickly recovered from brief losses
after Powell said that the Fed’s balance sheet would be
“substantially smaller”.

“The word ‘patient’ is used often when the Fed’s policy
direction is still tightening but its next rate hike can wait
for a considerable time. So risk assets now enjoy support from
what we can call Powell put,” said Tomoaki Shishido, economist
at Nomura Securities.

“Similarly, Trump also softened his stance on China after sharp
falls in stock prices. He has offered an olive branch to China
and there’s no reason China would not want to accept it,” he
said.

US and Chinese officials are working on arrangements for
higher-level trade talks after mid-level officials this week
discussed US demands that would require structural change in
China to address issues such as IP theft, forced technology
transfers and other non-tariff barriers.

US Treasury Secretary Steven Mnuchin said late on Thursday that
Chinese Vice Premier Liu He will “most likely” visit Washington
later in January for trade talks.

“For markets the upshot is that the outlook for 2019 is looking
better as tensions de-escalate, creating the potential for a
re-rating of risk assets as the tail risk of a near-term trade
war is partially priced out,” said Jeremy Lawson, chief
economist at Aberdeen Standard Investments in Edinburgh.

“This is especially the case in Asia,” he added.

Still, fundamental tensions between the US and China “are
unlikely to go away and there is a high likelihood that any
agreement to suspend tariffs eventually breaks down when it
becomes clear that Trump’s objectives cannot really be met.”

Some investors are also increasingly wary of lingering disputes
in Washington over a wall Trump wants on the US-Mexico border,
which has led to a weeks-long partial government shutdown.

Flanked by border agents who are going without paychecks during
the shutdown, Trump again threatened on Thursday to declare a
national emergency to bypass Congress to fund a wall.

In the foreign exchange markets, the dollar was broadly soft
after a small rebound from three-month lows the previous day.

The dollar index, measuring it against major peers, dipped 0.1
percent to 95.38.

The euro firmed 0.2 percent to $1.1523, while the dollar dipped
0.1 percent to 108.28 yen.

The yuan, both onshore and offshore, climbed to the highest
levels since late July, aided by a weaker dollar and rising
hopes of progress in the US-China talks.

In onshore trade, the Chinese currency has risen 1.6 percent
this week, the biggest gain since July 2005 when Beijing
abandoned the yuan’s peg to the dollar.

US Treasury debt prices erased early gains after a soft 30-year
bond auction and in reaction to Powell’s comments on the Fed
“substantially” reducing the size of its balance sheet.

The 10-year U.S. Treasuries yield last stood at 2.728 percent.

Crude prices held near one-month highs, but a more than
week-long in oil rally slowed as optimism surrounding US-China
trade talks faded a little.

In Asian trade, West Texas Intermediate crude futures slipped
0.6 percent to $52.30 per barrel. 

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