China leads Asia stocks higher, dollar advances as Fed rate hikes loom

By Ankur Banerjee

SINGAPORE (Reuters) - Asian equities rose on Friday, boosted by Hong Kong and China stocks, while the dollar was set for its best week in more than a month as investors priced in the prospect of the Federal Reserve taking interest rates above 5% next year.

MSCI's broadest index of Asia-Pacific shares outside Japan was 1.09% higher, while Australia's S&P/ASX 200 index rose 0.27%.

China's stock market was 1% higher, with Hong Kong's Hang Seng Index surging 3%.

On Thursday, U.S. stocks closed lower for a fourth consecutive session, while Treasury yields jumped, with the two-year note climbing above 4.7%. Early on Friday, E-mini futures for the S&P 500 fell 0.18%.

Global stocks have been rattled since comments from Fed Chair Jerome Powell on Wednesday that it was "very premature" to be thinking about pausing its rate hikes, putting a lid on any lingering investor hopes of a near term pivot.

"Chair Powell removes the punchbowl yet again, in response to a tiny bit of partying," Citi analysts said, referring to the past few days rise in equities over hopes of a change in tone from the central bank.

"The sensitivity of the Fed to improving financial conditions is seemingly quite high and we think is likely to remain so while inflation is too high for its liking," Citi adding, noting that it was not a good set up for risky assets.

Investors will be keeping an eye on Friday's U.S. payrolls report where any upside surprise will likely reinforce the Fed's hawkish outlook. Economists polled by Reuters expect nonfarm payrolls to have increased by 200,000 jobs in October.

In the currency market, sterling edged up 0.1% to $1.1170, after sliding 2% overnight when the Bank of England raised interest rates by the most since 1989, but warned a long recession looms.

The U.S. dollar index, which measures the greenback against a basket of currencies, firmed to 112.90, after surging 0.8% overnight and touching a roughly two-week high of 113.15.

In commodities, oil prices recouped early losses. [O/R]

U.S. crude futures were up 0.59% at $88.69 per barrel by midmorning and Brent was at $95.16, up 0.52%. Brent had shed 1.5% in the previous session.

Gold prices were little changed on Friday, but the metal was headed for a second straight weekly drop as a stronger dollar and Fed's hawkish policy stance clouded outlook for the non-yielding bullion.

 

(Editing by Kim Coghill)