Asian markets rally as UK scraps tax plan

Britain's tax backdown bounces stocks and sterling a pile of one pound coins is seen in a photo illustration.

SYDNEY Reuters -- Asian stocks bounced back on Tuesday after Britain scrapped bits of a controversial tax cut plan, tentatively improving global market sentiment and rallying bonds and the pound.

In trade slowed by holidays in China and Hong Kong, the broadest index of Asia-Pacific shares outside Japan increased 1%, leading to a 2.5% gain in Australia.

Japan's Nikkei rose 2.6%. The pound was up to an almost two-week high of $1.1343, making it a rebound of almost 10% from a record low last week after plans for unfunded tax cuts caused chaos on British assets.

According to John Briggs, head of economics and markets strategy at NatWest Markets, the on-face will not have a huge impact on the overall UK fiscal situation.

But investors took it as a signal that the UK government could and is partially willing to walk back from its intentions that so disrupted markets over the past week. Even though emergency purchases from the Bank of England were relatively modest, investors took heart from stability at the long end of the gilt market.

The S&P 500 futures rose 0.6% after a 2.6% bounce for the index overnight. N British finance minister Kwasi Kwarteng released a statement reversing planned tax cuts for top earners. It makes up only 2 billion out of a planned 45 billion pounds of unfunded tax cuts that had sent the gilt market into a tailspin last week.

South Korea's Kospi bounced 2.3%, lifting from last week's two-year low despite North Korea firing a missile over Japan for the first time in five years. The Reserve Bank of Australia meets on Tuesday to set interest rates with markets leaning toward a 50 basis point hike.

The recovery for sterling has settled some nerves in the currency market, but the strength of the dollar still holds a lot of major currencies near milestone lows and has authorities throughout Asia on edge.

Japan's yen was at 145 to the dollar on Monday, a level that prompted official intervention last week and was last at 144.71. The euro was at $0.9823, about three cents stronger than last week's 20 year trough. FRX Chinese authorities have rolled out manoeuvres to support the market, from unusually strong signals to the market to administrative measures that raise the cost of shorting it.

More volatility is almost certainly assured as FX markets focus on U.S. recession risks continue to build, said Miles Workman, ANZ senior economist. Miles Workman, with U.S. jobs data on Friday the next major data point on the horizon.

The Australian dollar went up around $0.65 ahead of the central bank meeting. The Reserve Bank of New Zealand meets on Wednesday and the kiwi holds at $0.5715. The benchmark 10 year yield dropped 15 basis points and the AUD Treasuries rallied in sympathy with gilts overnight. In Asia, it was steady at 3.6387%, having briefly risen above 4% last week.

Other indicators of market stress are abound. The CBOE Volatility Index remains above 30. The shares and bonds of Credit Suisse hit record lows on Monday as investors worried about the bank's restructuring plans swept markets.

Oil held overnight gains on the news of possible production cuts, and Brent futures were last up 43 cents to $89.29 a barrel.