Asian stocks snap four-day rally on Syria concerns, dollar gains

By Saikat Chatterjee

HONG KONG (Reuters) - Asian stocks snapped a four-day winning streak on Wednesday and safe assets like gold consolidated chunky overnight gains after President Barack Obama clinched the backing of two key figures in Congress in his drive for limited U.S. strikes on Syria.
The U.S. dollar stood tall even as risk appetite ebbed, on course for its best five day performance in two months against a basket of currencies as a stronger-than-expected slate of U.S. data emboldened greenback bulls.
MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> fell 0.5 percent after four days of gains. Philippines and Indonesia's stocks led declines in the region.
"There are still uncertainties stirred by the Fed's possible trimming of its stimulus program later this month and U.S.-led military action against Syria," said Shinyoung Securities analyst Lee Kyung-soo. "It's hard to rally against such uncertainties."
Risk appetite was noticeably on the back foot after key congressional leaders John Boehner and Eric Cantor both pledged their support for military action to punish President Bashar al-Assad for his suspected use of chemical weapons against civilians.
Their stance suggested that the vote could pass in Congress when lawmakers return to Washington on September 9, CitiFX wrote in a client note.
The increased sense of urgency pushed down benchmark ten-year U.S. treasury yields to 2.86 percent from overnight highs.
The U.S. bond moves came despite a U.S. manufacturing index surprising forecasts on the upside and set the tone for Friday's non-farm payrolls which could bolster expectations the Federal Reserve will begin to scale back its massive bond-buying program as early as this month.
Still, ten year U.S. yields are eight basis points above Friday's close and nearly 90 basis points higher since Fed Chairman Ben Bernanke's remarks in June that the central bank might scale back its monthly bond purchases.
Rising U.S. yields have hit demand for emerging market assets such as high-yielding currencies in Asia and sent debt yields there spiraling higher as global investors dumped these assets.
A JP Morgan index of emerging market debt in Asia hit 4 percent for the first time since November 2009, according to Thomson Reuters Datastream.
INDIA, INDONESIA
The brunt of the selloff has been felt by emerging market countries in Asia such as India and Indonesia which have been singled out by investors for punishment due to their reliance on capital inflows to paper over widening deficits.
In stark contrast to these two beleaguered economies, the Korean won punched above a 200-day moving average, a key technical level, against the U.S. dollar and rose above 1100 for the first time since early May.
While net equity flows are still negative on a year-to-date basis at $5.1 billion, they are a substantial improvement from a July low of nearly $9 billion, according to Brown Brothers Harriman strategists.
"India and Indonesia continue to be the weak spots in Asia while Thailand and Malaysia are also looking vulnerable. Investors continue to focus towards the relatively stronger economies of North Asia rather than the rest of the region," said Cynthia Wong, head of trading at Societe Generale in Hong Kong.
SHINING DOLLAR
In the currency market, the dollar was a big winner in the wake of the upbeat U.S. data, rising to a six-week peak against a basket of major currencies (NYF:^).
That dollar strength saw the euro slide to a six-week low of $1.3138, although it has since managed to edge up to $1.3170. Both the dollar and euro clung to modest gains on the yen, but could quickly lose them if geopolitical risk flared up.
Oil and gold rose on the news with U.S. crude at $108.29 a barrel, having jumped nearly 1 percent on Tuesday. Spot gold traded at $1,412.95 an ounce following a 1.3 percent rally overnight as investors sought safety.
Working against the yen for now, the Asahi newspaper reported that the Bank of Japan will consider further monetary easing if Prime Minister Shinzo Abe decides to raise the sales tax as planned to 8 percent from 5 percent in April.
The Australian dollar got a boost after an HSBC survey on China's services sector printed at a five month high adding to views that the world's second-biggest economy has turned a corner. China is Australia's major export market.
Separate data showed Australia's economy grew moderately last quarter as modest gains in consumer and government spending offset a very flat performance elsewhere.
The Aussie built on Wednesday's gains after the Reserve Bank of Australia (RBA) gave no clear hint that it would cut its cash rate soon, following a widely expected decision to leave it at a record low 2.5 percent.
On Thursday, policy decisions from major central banks including the Bank of Japan and European Central Bank will take center stage. Neither the BOJ nor the ECB is expected to inject fresh stimulus.

(Additional reporting by Jungmin Jang in Seoul and Amanda Tan in Sydney; Editing by Shri Navaratnam)