* Trump tweets that China trade talks are going well
* Hopes of a U.S.-China trade deal underpin risk assets
* Markets show little reaction to Trump’s address on border wall
* Oil prices also extend rally on trade deal hopes
By Hideyuki Sano and Tomo Uetake
TOKYO, Jan 9 (Reuters) - Asian shares climbed to a 3-1/2-week high on Wednesday, supported by growing optimism that the United States and China can strike a trade deal to avoid an all-out confrontation that would severely disrupt the global economy.
MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.5 percent to its highest level since Dec. 14.
Japan’s Nikkei rose 1.3 percent, while China’s benchmark Shanghai Composite and the blue-chip CSI 300 rebounded 1.5 percent and 1.8 percent, respectively.
U.S. stock futures also firmed.
Wall Street’s S&P 500 gained nearly 1 percent on Tuesday, extending its rebound from 20-month lows touched around Christmas to more than 9 percent.
The United States and China agreed to extend trade talks in Beijing for an unscheduled third day on Wednesday, amid signs of progress on issues including purchases of U.S. farm and energy commodities and increased access to China’s markets.
But sources said the two sides were still far apart from U.S. demands for structural reforms in China.
President Donald Trump wrote on Twitter overnight that “Talks with China are going very well!”
Bloomberg reported Trump is increasingly eager to strike a deal with China soon in an effort to perk up financial markets that have slumped on concerns over the trade war, citing people familiar with internal White House deliberations.
The rally in riskier assets has accelerated since last Friday, when Federal Reserve Chairman Jerome Powell said he was aware of risks to the economy and would be patient and flexible in policy decisions this year.
“Markets are scaling back some of their extreme nervousness after Powell effectively did some easing, with his words. But short-covering could run its course soon,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“Hopes on U.S.-China trade talks are helping. Some sort of deals are likely to increase Chinese imports of natural gas, soybeans and so on from the U.S. Yet, it should be hard to resolve more structural issues such as intellectual property rights,” he added.
Oil prices also extended a rally on hopes of progress in the trade talks.
U.S. West Texas Intermediate (WTI) crude oil futures rose above $50 per barrel overnight for the first time in 2019. They rose 1.5 percent in Asia to $50.51.
U.S. bond yields also climbed, with the benchmark 10-year Treasuries yield rising to 2.733 percent, compared with its one-year low of 2.543 percent hit just before Friday’s strong payrolls data.
In another sign of subsiding worries about the U.S. economic outlook, Fed funds rate futures show traders are now pricing in only a small chance of a rate hike this year, a change from late last week when a rate cut was almost fully priced in.
In currency markets, the dollar was little changed against major currencies.
The euro traded at $1.1452 while the dollar stood at 108.89 yen.
There was little market reaction to Trump’s prime-time televised address where he made his case that a U.S.-Mexico border wall is urgently needed, despite opposition from Democrats.
That suggests the dispute on the issue, which has sparked a government shutdown since late December and already caused some delays in the release of key U.S. economic data, is nowhere near a resolution. (Editing by Jacqueline Wong & Kim Coghill)