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Singapore - Asian stocks extended gains, trimming their worst month since February amid optimism the global economy is strong enough to withstand a boost to US borrowing costs that may come as early as June.
The dollar retreated versus major peers, paring its best rally since 2014.
Gains in Japan and Hong Kong pushed the regional equity benchmark up for a fifth straight day. China’s equities shrugged off a flash-crash in index futures with the Shanghai index heading for its biggest gain since March.
Currencies from Australia to South Africa and Britain chipped away at the dollar. Gold climbed for the first time in 10 days, halting its longest slump in more than a year, as Treasuries dropped on their first day of trading this week. American crude oil headed for its longest run of monthly gains in five years amid output disruptions.
The Fed’s rate outlook continues to occupy markets as traders maintain odds of a hike in July at more than 50%.
With US officials emphasizing that any policy tightening is dependent on the economy continuing to improve; investors will be scrutinizing American payrolls and personal income data due this week.
The potential for higher US yields has revived the greenback in May, with a gauge of the currency versus major peers up more than 3% this month. Meanwhile, data is painting a lacklustre picture of Japan’s economy, with bets leaders will have to boost stimulus weakening the yen.
"In either June or July, they’re going to" raise US interest rates, said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. "The economy is not in a bad condition."
Data on personal spending and income greet investors in the US returning from Monday’s Memorial Day holiday, with the jobs report due on Friday. Markets in the UK also resume Tuesday after a break. Singapore and Indonesia will update on money supply, Thailand reports on trade and Hong Kong posts on retail sales. Later in the session, India will report on first-quarter gross domestic product.
For more on how Treasuries are losing out to equities, click here.
"While keeping an eye on U.S. monetary policy, market participants will also be looking at which way the market could go next,” said Toshihiko Matsuno, chief strategist at SMBC Friend Securities in Tokyo.
"Investors want to see how US markets react after their holiday."
Stocks
The MSCI Asia Pacific Index climbed 0.6%. The measure is still down 1.7% in May, its worst monthly drop since February. In January it tumbled 8% amid global anxiety over China.
Japan’s Topix index gained 0.8% after fluctuating at the start of the session, on track for a 2.7% advance in May, while energy and consumer companies led Australia’s S&P/ASX 200 Index down 0.2%, trimming its third straight monthly climb to 2.8%. The Kospi index in Seoul rose 0.6%.
The Shanghai Composite Index jumped 2.4%, set for the steepest climb since March 30. Contracts on the CSI 300 Index dropped as much as 10% at around 10:42 a.m. local time, recovering almost all of the losses in the same minute. The move had little effect on the underlying CSI 300, which rose 2.6% at the midday break.
In Hong Kong, the Hang Seng and Hang Seng China Enterprises indexes rose more than 1%. Singapore’s Straits Times Index advanced 1%.
For more on Chinese equity trading and mounting short bets, click here.
Index operator MSCI will start including American Depository Receipts of Chinese shares in its stock gauges as of Tuesday’s close, giving passive investors bigger stakes in China’s technology and services companies, while downsizing state-run industrial and financial equities. MSCI will decide in June whether to include mainland-traded A shares as well.
Futures on the S&P 500 Index were up 0.2% from Friday’s close, to 2 102.25. Comments from Fed Chair Janet Yellen on Friday supporting the case for a rate increase in the next few months sent the US benchmark up 0.4%.
Currencies
The yen weakened 0.2% to 111.29 per dollar, even as most major currencies rallied. Australia’s dollar climbed 0.8%. South Africa’s rand rose 0.5% and the pound strengthened 0.4%.
After rallying over the past two sessions the dollar took a breather, with the Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, down 0.1%. The index is still up 3.5% in May, after retreating over the previous three months.
Bets on the Fed increasing rates at next month’s meeting have jumped to 30%, from 12% a month ago, while odds of a move in July are at 54%, up from 26%, according to Fed funds futures tracked by Bloomberg.
Fed officials including Chair Janet Yellen have flagged the possibility of a rate increase as soon as June over the past two weeks.
"US policy normalization and its likely impact has remained a key theme for markets,” Mark Smith, a senior economist in Auckland at ANZ Bank New Zealand, said in a note to clients.
"The dilemma facing the data-dependent Fed is that some US data does not look as strong as it once did, with the manufacturing sector under the pump. At some stage the Fed will choose which course of action it will take, and trust that the economy - and financial markets - are resilient enough to bear it."
Bonds
Treasuries declined, sending the yield on benchmark 10-year notes up by one basis point to 1.86%.
Australian government securities retreated, reversing initial gains, after the statistics bureau said net exports contributed 1.1 percentage points to gross domestic product, more than the 0.7 point increase forecast in a Bloomberg survey of economists. The yield on 10-year bonds rose two basis points to 2.30% in Sydney, after earlier declining two basis points.
Japanese two-year debt advanced after a sale of the securities drew the strongest demand since December 2014. The yield on the bonds declined 0.5 basis point to minus 0.245%. Yields on 10-year Japanese notes were unchanged at minus 0.115%.
Commodities
Gold for immediate delivery jumped 0.6% to $1 212.06 an ounce, after sliding almost 6% over the previous nine days as the prospect of a US rate hike diminished the precious metal’s appeal.
Copper declined at least 0.4% with lead as the London Metals Exchange started trading for the week, while nickel surged 0.7%.
West Texas Intermediate crude was up 0.4% from Friday’s close in the US, to $49.53 a barrel, as traders await Thursday’s meeting of OPEC suppliers. WTI has climbed 7.8% in May, its fourth straight monthly advance and the longest stretch of gains since 2011.
Militant attacks have cut Nigerian oil supply to the lowest level in more than two decades while Canadian output is still stabilizing after sliding amid wildfires.
Libya’s Petroleum Facilities Guard captured a town near the Es Sider and Ras Lanuf oil-loading terminals after fierce clashes with Islamic State militants.
