February 27, 2018 / 3:08 AM / 8 months ago

GLOBAL MARKETS-Asian shares rise to 3-week high ahead of Powell's testimony

* Asian shares recoup 60 pct of losses

* MSCI ACWI on course to log first monthly loss since Oct 2016

* Rise in dollar interest rates, yield still a threat to shares

By Hideyuki Sano

TOKYO, Feb 27 (Reuters) - Asian shares extended their recovery on Tuesday, hitting a three-week high as U.S. borrowing costs eased ahead of Federal Reserve Chairman Jerome Powell’s highly-anticipated first congressional testimony later in the day.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, building on its bounce from a two-month low touched on Feb. 9.

It has now recouped more than 60 percent of its losses from a sharp global rout in early February.

Japan’s Nikkei rose 1.0 percent to three-week highs.

On Wall Street, the S&P 500 advanced 1.18 percent on Monday helped by fall in U.S. bond yields.

The 10-year U.S. Treasuries yield eased to 2.864 percent, dropping further from its four-year peak of 2.957 percent touched on Feb 21, driven by month-end buying as well as position adjustments ahead of Powell’s testimony.

Powell’s debut appearance is seen as critical for financial markets at a time when many investors are nervous about the Fed’s policy normalisation following years of stimulus after the financial crisis almost a decade ago.

Many investors expect the Fed to raise interest rates three times this year, with some pundits predicting four, if U.S. inflation starts to take off, especially as growth is set to get another boost from the Trump administration’s tax cuts and spending plans.

Yet, there are worries higher dollar bond yields could prompt investors to shift funds to bonds from riskier assets, especially when the valuation of the world’s stocks are quite expensive even after their sell-off earlier this month.

The two-year U.S. Treasuries yield xx percent, well above dividend yield of the S&P 500, which stood at 1.88 percent.

A rise in dollar interest rates could also bode ill for potential borrowers, including U.S. home buyers and many companies that have expanded borrowing for years to take advantage of low dollar funding costs.

“Expectations that Powell will be sensitive to financial markets appear to be running high. But he hasn’t said he will sacrifice policy normalisation for the sake of financial markets. I feel there is room for disappointment in markets,” said Hiroko Iwaki, senior bond strategist at Mizuho Securities.

MSCI’s gauge of equity market performance in 47 countries rose 0.2 percent on Tuesday after Monday’s 0.8 percent gain, rising above its Feb. 16 high to hit a three-week top.

Still, it is down 2.2 percent so far this month, suggesting its record 15-month winning streak that began in November 2016 is at risk.

“The combination of low interest, low inflation and strong economic growth, the best combination for markets that also kept market volatilities low, is coming to an end,” said Mutsumi Kagawa, chief global strategist at Rakuten Securities,

He said that while corporate earnings will likely remain strong for a while longer, underpinning stocks, market volatility will be higher.

In the currency markets, the euro traded at $1.2338, up 0.2 percent in Asia but off its three-year high of $1.2556 hit earlier this month.

The dollar traded at 106.98 yen, stabilising for now above its 15-month low of 105.545 set on Feb 16.

Fed funds rate futures were almost fully pricing in a rate hike at the Fed’s next policy meeting on March 20-21.

Oil prices held firm at three-week highs, supported by supported by signs of stronger demand, robust production curbs led by OPEC and a slight fall in U.S. output.

U.S. West Texas Intermediate futures fetched $64.00, up slightly on Tuesday, after hitting a 20-day high of $64.24 the previous day.

London Brent crude traded flat at $67.47 a barrel, having hit a three-week high of $67.90 the previous day.

Editing by Shri Navaratnam and Kim Coghill

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