Stocks in Asia rise as China rescue report keeps investors on edge

By Ankur Banerjee

SINGAPORE (Reuters) -Asian shares rose on Wednesday on optimism that Chinese authorities will offer support for its stock markets, which have plummeted to multi-year lows, while a hawkish tilt from the Bank of Japan lifted the yen and nudged bond yields there higher.

The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.4%. Still, the index is down 5% in January, set for its worst monthly performance since August.

Investor focus will be on manufacturing purchasing managers' index (PMI) figures, which are seen as a good gauge of economic health, from the euro zone, Germany, France and Britain later in the day ahead of a European Central Bank (ECB) meeting on Thursday.

The ECB is widely expected to keep rates unchanged, but traders are pricing in as much as 130 basis points of interest rate cuts this year.

The spotlight in Asia has been squarely on Chinese equity markets after a wretched start to the year.

A Bloomberg report on Tuesday that said Chinese authorities were preparing a package of measures worth $278 billion to stabilise the slumping stock market offered some hope markets may steady, though investors remained sceptical and unimpressed.

"I suspect policymakers would prefer markets to be more stable, but I doubt they plan to make huge unconditional injections into markets," said Ben Bennett, APAC investment strategist for Legal and General Investment Management.

"More they want to suggest that it’s not a one-way bet for markets to go down. Hopefully this leads to a bit of stabilisation now."

"While a big bang stimulus package remains out of the picture, the mood is markedly bearish that any relief package can lead to a violent snapback in Chinese equities."

The Japanese yen strengthened 0.30% to 147.91 per dollar. The BOJ on Tuesday maintained its ultra-easy monetary settings but signalled its growing conviction that conditions for phasing out its huge stimulus were falling into place, suggesting that an end to negative interest rates was nearing.

The index is up 2% this month, on course for its strongest monthly performance since September as traders walk back their expectations of early and steep interest rate cuts from the Federal Reserve.

This week, the spotlight will switch to the U.S. personal consumption expenditure (PCE) index data, the Federal Reserve's preferred inflation gauge, as well as the S&P PMI readings, to assess the outlook for interest rates.

Markets are now pricing in a 47% chance of a rate cut in March from the Fed, according to the CME FedWatch tool, compared to the 88% chance of a rate cut priced in a month earlier.