Asia Shares Mostly Firm, China Sets Yuan Higher

Chinese markets slip into losses while the rest of Asia snaps back from the five-session losing streak.

• Nikkei bounces 4.7 percent after worst week since 2008
  
• China shares slip on return from long Lunar holidays
  
• China’s central bank sets yuan sharply higher, warns off speculators
  
• US stock markets closed for Presidents’ Day holiday
  

Asian shares bounced to snap a five-session losing streak on Monday as a strong fix for China’s yuan eased devaluation concerns and Shanghai stocks returned from the Lunar New Year holidays with only modest losses.

The Shanghai Composite Index eased 2.2 percent in its first session since 5 February, a relatively benign move given the wild swings seen worldwide recently.

More troubling were the January readings on Chinese trade which showed exports fell 6.6 percent in yuan terms from a year earlier, while imports dived 14.4 percent.

Still, rallies in European bank stocks and on Wall Street on Friday helped soothe jitters enough for MSCI’s broadest index of Asia-Pacific shares outside Japan to rise 1.2 percent. That follows a loss of almost 4 percent last week.

Japan’s Nikkei jumped 4.7 percent to retrace some of last week’s 11 percent drop, the largest such fall since 2008, though sentiment remained fragile.

Although we consider the violent risk-off move of recent weeks largely unwarranted by economic fundamentals, the sheer magnitude of the sell-off has raised the risk that market volatility could feed back into the real economy. Central banks have very limited ability to ride to the rescue of risk assets.

Ajay Rajadhyaksha, Economist, Barclays

Barclays pointed to three sources of volatility that had potential negative feedback loops: lower oil prices, capital outflows and macroeconomic weakness in China, and pressure on European banks.

“Of these, we consider China the biggest medium-term risk, but the least immediate issue,” wrote Rajadhyaksha.

The People’s Bank of China (PBOC) took the opportunity of the US dollar’s recent decline to fix its yuan at its highest in over a month on Monday, hoping to deflect speculation about a possible devaluation.

The Dow ended Friday with a gain of 2 percent, while the S&P 500 added 1.95 percent and the Nasdaq 1.66 percent. The rally snapped a five-day losing streak, but all three indices were still down on the week.

Global oil prices had also surged as much as 12 percent on Friday after a report once again suggested OPEC might finally agree to cut production to reduce the world glut.

Early Monday, US crude had eased 35 cents to $29.09 a barrel, while Brent crude dipped 45 cents to $32.91.