SYDNEY Asian shares recovered from early losses on Tuesday as investors weighed the costs of the coronaviruses in China against the longer-term benefits of a reopening of the world's second-largest economy.
The broadest index of Asia-Pacific shares outside Japan was up 0.5 per cent, having dropped more than 1.0 per cent in choppy early trading.
The Japanese markets were shut for a holiday, making for some choppy moves. Nikkei futures were trading at 25,750 compared with the last close for the cash index of 26,094.
Investers were encouraged by a 1.3 per cent bounce in the Hang Seng, which had been off more than 2 per cent at one stage, while Chinese blue chips went up 0.2 per cent.
China's factory activity shrank at the fastest pace in nearly three years as COVID 19 infections swept through production lines, according to a series of surveys.
Analysts at Capital Economics said that China is entering the most dangerous weeks of the epidemic.
The migration ahead of the Lunar New Year starts soon and parts of the country not currently in a major COVID wave, the authorities are making no efforts to slow the spread of infections. Mobility data showed that economic activity was depressed nationwide and would likely remain so until the infection wave subsides, they added.
Wall Street was in a guarded mood, with S&P 500 futures and Nasdaq futures up 0.1 per cent. EUROSTOXX 50 futures fell 0.6 per cent and FTSE futures 0.1 per cent.
The labor market remains tight and EU consumer prices could show a slowdown in inflation as energy prices in the US drop, according to data on U.S. payrolls this week.
In 2023 energy base effects will cause a reduction in inflation in major economies but stickiness in core components will prevent a dovish policy 'pivot' by central banks, according to analysts at NatWest Markets.
They expect interest rates to top out at 5 per cent in the United States, 2.25 per cent in the EU and 4.5 per cent in Britain and stay there for the entire year. Markets are pricing in rate cuts for late 2023, with Fed fund futures implying a range of 4.25 to 4.5 per cent by December.
Minutes of the December meeting of the Federal Reserve this week will show how many members saw risks that interest rates would need to go higher for longer, but investors will be attuned to any talk of pausing due to the fact that rates have already risen.
While markets have priced in an eventual U.S. easing, they were badly wrong-footed by the Bank of Japan's shock upward shift in its ceiling for bond yields.
The BOJ is considering raising its inflation forecasts in January to show price growth close to its 2 per cent target in fiscal 2023 and 2024, according to the Nikkei.
Such a move at its next policy meeting on January 17 -- 18 would add to speculation of an end to ultra-loose policy which has acted as a floor for bond yields around the world.
The dollar lost 5 per cent in December and the euro 2.3 per cent in December, with the policy shift boosting the yen across the board.
The dollar lost ground on Tuesday as it fell 0.9 per cent to a six month low of 129.52 yen, having breached major chart support at 130.40. The euro fell to its lowest level in three months at 138.26 yen.
The euro was steady on the dollar at $1.0679 after meeting resistance around $1.0715, while the dollar index was holding at 103.480.
In commodity markets, gold made a new six month high of $1,842. An ounce is 99 an ounce.
Oil prices fell due to concerns about the state of global demand. Brent lost 41 cents to $85.50 a barrel, while U.S. crude fell 33 cents to $79.3 per barrel.