Asia stocks up, dollar rally pauses in relief for emerging markets

By Saikat Chatterjee

HONG KONG (Reuters) - Asian stocks rose to three-week highs on Wednesday, supported by gains on Wall Street and growing expectations the dollar may be peaking after a hefty rally since the U.S. election pulled funds out of emerging markets.

Oil bounced as investors looked ahead to developments at the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna later in the day.

A six percent rise in the dollar against a trade-weighted basket of currencies since Republican Donald Trump's upset U.S. election win has hammered emerging markets, as investors pulled money out in favor of U.S. dollar-based assets on bets Trump will boost fiscal spending, growth and inflation.

More than $16 billion have been sucked out of emerging markets in the two weeks following the Nov. 8 vote but stock exchange data in India, Indonesia, Philippines, Taiwan, Thailand and South Korea indicate the outflows may be slowing.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, its highest since Nov. 11. Still, it is set for a second consecutive monthly drop in a sign of the uncertainty around Trump's presidency and the outlook for global growth.

Australian shares were down 0.5 percent, the Nikkei up 0.1 percent and South Korea 0.4 percent higher.

"We are starting to see some pull back on the U.S. reflation trade and stabilisation in US rates," said Fan Cheuk Wan, head of Asia investment strategy at HSBC Private Bank.

"As a result we see good investment opportunities in the Asian markets in the coming months, particularly in markets which have a strong domestic focus and positive reform progress."

Valuations also remain attractive for Asian stocks. On a price-to-book basis, MSCI Asia ex-Japan remains below a ten year median value of 1.8 times, according to Thomson Reuters data.

In currency markets, the dollar continued to take a breather against a trade-weighted basket of its peers, down 1 percent in the last four days.

The dollar's recent gains - 7 percent versus the yen and 3 percent against the euro - has come on the back of expectations of stepped up fiscal spending, higher inflation and a faster pace of monetary tightening by the Federal Reserve. However, market watchers say further dollar gains will be hard fought.

"The expectations phase will likely end soon as investors are focused on what the real impact of the Trump administration would be on the market," said Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management.

Treasury yields have edged lower after peaking at 2.42 percent on the ten-year benchmark bond last Friday. The curve, the gap between the ten and two year yield, has steepened by 20 basis points in the last three weeks.

Oil slumped by roughly 4 percent on Tuesday before bouncing somewhat as most analysts concluded the OPEC bloc would cobble together a deal in Vienna to cut production to some extent. The meeting starts at 1000 GMT.

Brent futures were up 0.9 percent at $46.80 per barrel while U.S. crude gained 0.6 percent to $45.50 per barrel.

A broad index of commodities was down 2 percent. Spot gold was up 0.4 percent at $1192.74 an ounce.

(Additional reporting by Ayai Tomisawa in TOKYO; Editing by Eric Meijer & Shri Navaratnam)