Asian markets led lower by China, but relief over Ueda ruling out BOJ tightening

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SYDNEY — Asian share markets were dragged lower by the slide in Chinese stocks on Friday, though investors took heart from the incoming head of Japan’s central bank ruling out an early end to super-easy monetary policy, nudging bond yields lower globally.

European share markets are set to open higher, with the pan region Euro Stoxx 50 futures up 0.4%. The S&P 500 futures, however, was flat, while Nasdaq futures were off 0.2%.

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During a lower house confirmation hearing, Kazuo Ueda, who will take over as governor of the Bank of Japan (BOJ) in April, said the central bank must maintain ultra-low interest rates to support the fragile economy, warning of the dangers of responding to cost-driven inflation with monetary tightening.

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“Overall Ueda is working hard to present himself as delivering continuity – at least to start with,” said Sean Callow, senior currency strategist at Westpac.

Japan’s five-year government bond yield fell to 0.235%, from the previous close of 0.240%, while the 20-year yields eased 2 basis points to to 1.28%.

Ten-year bonds did not trade on Friday due to thin liquidly, after breaching the upper limit of BOJ’s policy cap for two straight days. Bond futures extended gains.

The Nikkei share index was up 1.1%.

The yen remained choppy. It reversed an early rise to be largely flat at 134.71 per dollar.

Data on Friday showed Japan’s annual core consumer inflation had hit a fresh 41-year high of 4.2% in January, keeping the central bank under pressure to phase out its massive stimulus program.

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Meantime, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, heading for a hefty weekly drop of 2.0%.

In particular, Chinese blue chips tumbled 1.0% and Hong Kong’s Hang Seng Index dropped 1.3% while Australia’s resources-rich shares edged up 0.3%.

On Wall Street, stocks ended a topsy-turvy Thursday in positive territory, with the Dow Jones Industrial Average up 0.33%, the S&P 500 gaining 0.53% and the Nasdaq Composite adding 0.72%.

Investors were bracing for the release on Friday of the U.S. personal consumption expenditures (PCE) price index for January, the Federal Reserve’s preferred inflation measure. The index is expected to be up 0.4% from a month earlier, compared with 0.3% the previous month.

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“The U.S. dollar index should extend its rise towards 106 if today’s US PCE deflators lift the US Treasury 2Y yield above the 4.5-4.75% Fed Funds Rate range,” said analyst at DBS Bank.

“Fed officials believed that the U.S. economy was not as weak as initially feared and that disinflation was not as secure as desired.”

Overnight, strong data, including an unexpected fall in new claims for unemployment and a revised uptick in the fourth-quarter PCE price index, suggested some strength in the economy.

The dollar index, which measures the safe-haven dollar against six peers, was hovering at 104.56, not too far from a seven-week high of 104.78.

In Treasuries, the yield on the benchmark 10-year government bonds eased to as far as 3.8590%, compared with the previous close of 3.8810%.

The two-year bond yield was hovering at 4.7015%, compared with the previous close of 4.6930%.

In the oil market, Brent crude futures rose 0.8% to $82.84 while U.S. West Texas Intermediate (WTI) crude was also up 0.8% at $75.99.

Gold was slightly higher. Spot gold traded at $1824.89 per ounce.

(Reporting by Stella Qiu; Editing by Bradley Perrett & Simon Cameron-Moore)