Asian markets rally as UK scraps tax plan

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.

The broadest index of Asia-Pacific shares outside Japan rose 1% in trade, boosted by a 2.5% gain in Australia, which was a key factor in trade thinned by holidays in China and Hong Kong.

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

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

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

S&P 500 futures futures ESc 1 rose 0.6%, after a 2.6% bounce for the index overnight.

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 away from last week's two-year low despite North Korea firing a missile over Japan for the first time in five years.

On Tuesday, the Reserve Bank of Australia meets 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, a three cents higher than last week's 20-year trough.

Chinese authorities have rolled out manoeuvres to support the yuan, from unusually strong signals to the market to administrative measures that raise the cost of shorting it.

The US jobs data on Friday will be the next major data point on the horizon, as FX markets focus on US recession risks continue to build, said Miles Workman, senior economist at the ANZ, with US jobs data on Friday being the next major data point on the horizon.

The Australian dollar wobbled around $0.65 ahead of the central bank meeting. The Reserve Bank of New Zealand meets on Wednesday and the kiwi is at $0.5715.

The benchmark 10 year yield dropped 15 basis points and the Treasuries rallied in sympathy with gilts overnight. It was in Asia at 3.6387%, having briefly poked above 4% last week.

Other indicators of market stress are abound. The CBOE Volatility Index remains above 30. Credit Suisse's bonds hit record lows on Monday because of concerns over the bank's restructuring plans.

On news of possible production cuts, oil LCOc 1 held overnight gains, and Brent futures were last up 43 cents to $89.29 a barrel.