Asian shares dip, soaring US bond yields rattle emerging markets

TOKYO: Asian shares dipped while the dollar strengthened broadly on Friday as US bond yields soared on expectations US President-elect Donald Trump's policies would stoke inflation.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.2 percent, with Korean shares .KS11 off 0.5 percent. Australian shares eked out small gains of 0.1 percent.

Japan's Nikkei .N225 also rose more than 1 percent to 6-1/2-month highs thanks to a weaker yen.

On Wall Street, US S&P 500 Index .SPX rose 0.2 percent while the Dow Jones industrial average .DJI jumped 1.2 percent, smashing through its previous record high set in August by almost 1 percent.

In contrast, the technology-heavy Nasdaq fell 0.8 percent .IXIC, with Apple APPL.O dropping 2.8 percent.

"The market's focus has shifted to Trump's policy after the initial knee-jerk risk-off reaction. The markets think he is likely to protect the US domestic economy, especially the old economy," said Koichi Yoshikawa, executive director of financial markets at Standard Chartered Bank.

"That explains why the Dow was up and the Nasdaq was weak," he added.

Financial sector .SPSY surged 3.7 percent to its highest since the 2008 global financial crisis, as Trump has sided with leading conservatives in calling for the repeal of the 2010 Dodd-Frank Financial Reform Act largely opposed by banks.

US bond markets also saw dramatic moves since Trump's victory, with the 10-year U.S. Treasury yields hitting their highest levels in 10 months.

Expectations that his policy stance - from protectionism and fiscal expansion - will boost inflation have been driving the surge in US yields.

The 10-year US yield US10YT=RR rose to 2.15 percent, almost 30 basis points, or 0.30 percentage point, above its levels around 1.86 percent just before the U.S. election.

The 30-year yield US30YT=RR rose 38 basis points, posting its biggest weekly jump since 2009 before a US market holiday on Friday.

Soaring US yields have been a boon to dollar bulls. The euro dipped to $1.08905 EUR=, compared to $1.1025 before the US elections.

The dollar strengthened sharply against the yen, which has traditionally a strong inverse correlation with U.S. yields because higher US yields encourage Japanese investors to buy more U.S. debt.

The dollar rose to as high as 106.95 yen JPY=, its highest since late July, compared to around 105.15 yen before the elections.

On the other hand, some emerging market currencies were hammered by concerns investors could pull back their funds out of higher-yielding emerging countries to the US.

The Mexico peso MXN=D2, which has been hit by Trump's threat to scrap the country's key free trade agreement with the United States and build a massive wall along the border, sank to near its record low.

The peso has fallen 7.5 percent so far this week.

The Brazilian real BRL= shed 5 percent on Thursday to a five-month low while its benchmark Bovespa .BVSP stock index slumped 3.3 percent.

In Asia, the Korean won KRW= is under pressure because of concerns about Trump's foreign policy and his commitment to security in East Asia. The won traded at its lowest level in more than four months.

Markets are also expecting the US Federal Reserve to go ahead with a rate hike in December, given signs of stability in the U.S. share markets.

The money market futures FFZ6 FFF7 are pricing in about 75 percent chance of a rate hike.

In a remarkable shift of sentiment, the market is also now starting to price in a chance of a rate hike by the European Central Bank for the first time since 2011.

Elsewhere, oil prices eased as the market looked to whether OPEC will decide later this month to cut production to address long-running over supply concerns.

US crude futures CLc1 fell 0.5 percent to $44.42 per barrel.