Asian stocks cut gains as caution grows; dollar eyed

By Saikat Chatterjee

HONG KONG (Reuters) - Asian stocks cut early gains as investor caution grew before a news conference by President-elect Donald Trump on Wednesday, where his views on global trade and China will be carefully scrutinised for future policy implications.

The dollar stood tall against rivals on Monday after the latest U.S. payrolls data indicated strong underlying wage growth, strengthening the case for more rate increases in 2017.

MSCI's ex-Japan Asia-Pacific shares index was flat on the day, having risen as much as 0.5 percent after posting a rare loss in the previous session. Australia's S&P/ASX200 rose 0.9 percent while Hong Kong shares rose 0.2 percent.

Trading was light because Japan is shut for a holiday.

The caution in Asia is expected to ripple into European markets with futures pointing to a cautious start for various exchanges.

"The dollar's rising strength will be a growing concern for Asian markets, particularly Hong Kong, and investors will be waiting for Trump's comments to get some clues on what areas the new administration will focus on," said Alex Wong, a portfolio manager at Hong Kong-based Ample Capital.

Foreign investors will be wary of buying Hong Kong assets as the currency is pegged to the U.S. dollar, while the domestic business environment, particularly for retailers, will suffer more as residents up spending abroad.

Notwithstanding the growing worries around Trump's stance on trade with emerging markets, 2017 has begun on a positive note in terms of capital flows for Asian markets, helped by an extended rally in U.S. equities.

Combined investment flows into Asia were positive at nearly $600 million for the week ending 4th January, reversing outflows posted for the previous week, data compiled by Nomura analysts shows.

U.S. stocks ended at record highs, fuelled by optimism over Trump's plans to stimulate the economy with lower taxes and increased infrastructure spending. Both the Nasdaq and the S&P 500 ended at record highs. [.N]

But with markets perched at record highs and valuations at the upper end of historical trading ranges, particularly in the United States, market analysts are keenly aware that even a small disappointment from Trump's policy proposals could trigger a massive wave of profit-taking.

In currencies, the dollar started the week on a firm note after Friday's data showed a rebound in U.S. wages, pointing to sustained labour market momentum and more rate increases by the U.S. Federal Reserve. "With expectations of more rate hikes on the horizon, we believe the dollar will resume its upward trend versus emerging market Asia currencies in the coming weeks," Gao Qi, an FX strategist at ScotiaBank in Singapore, wrote in a client note. The dollar was trading at 117.47 yen, nearly 2 percent above Friday's lows of around 115. It was steady at 102.40 against a basket of currencies China's yuan gained on Monday after Beijing's daily official fixing was stronger than market expectations and following weekend news that foreign exchange reserves fell to near six-year lows as authorities stepped up their intervention to protect the currency. Bonds were stung by the strong U.S. data, with both two-year and 10-year U.S. Treasury yields inching higher as market participants eyed the probability of more rate hikes in 2017. The yield on two-year U.S. Treasury notes was perched at 1.21 percent, off Thursday's low of 1.17 percent. Oil prices edged lower, thanks to a stronger dollar and growing concern whether OPEC producers would stick to an agreement to cut output. Brent crude futures were down 0.3 percent in early trade.

(Editing by Eric Meijer)