Asia report: Stocks climb and yen falls as North Korea worries recede

Asia-Pacific stocks mostly finished higher on Tuesday as tension around North Korea receded, though the Hang Seng was an outlier in the red.

Japan's Nikkei closed 1.1% higher at 19,753.31, the Shanghai composite gained 0.4% to 3,251.26, Mumbai's Nifty added 0.86%, Sydney's climbed 0.5% despite the sell-off in energy stocks and Seoul's exchange was closed for a holiday.

The MSCI Asia Pacific benchmark was modestly above flat at 158.47, while the Heng Seng fell 0.3% to 27,174.96 and the Japanese yen and gold, two historical safe haven markets, both fell.

"The risk rebound continues in financial markets on Tuesday, as tensions between the US and North Korea appear to ease and investors gradually unwind their safe haven trades from last week," said Oanda analyst Craig Erlam.

There was still some simmering economic tension, however, after the US launched an investigation into China's trade and alleged theft of intellectual property.

Donald Trump's decision to sanction the probe was a "baring of fangs" that will hurt both sides, China's state news agency Xinhua said.

Beijing said on Tuesday that it will take action to defend its interests if the inquiry damages trade.

Though with Washington considering sanctions on Venezuela's oil industry, blocking imports of about 740,000 barrels per day to the US, Asia would be the main beneficiary, Reuters reported, citing traders and analysts, as redirected supply could make up for cuts elsewhere.

CHINESE CREDIT

The major data release was on credit growth in China, which rose slightly last month - though economists expect the long-term downwards trend will again reassert itself, weighing on growth.

New lending slipped in July, with net new local currency loans from China's banks rising by 826bn yuan, down from 1,540bn yuan for June, according to the People's Bank of China.
In parallel, so-called total social financing, the PBoC's preferred measure of credit, saw a smaller increase of 1,220bn yuan in July, down from 1,776bn in June.

According to Julian Evans-Pritchard at Capital Economics, that drop was entirely due to seasonal factors and followed the prior month's rush by loan officers to hit their six-month targets for lending.
Indeed, growth in outstanding bank loans and TSF accelerated to a 13.2% year-on-year clip in July, up from 12.9% and 12.8% in June, respectively, Evans-Pritchard pointed out.
Nonetheless, while the PBoC was likely now done tightening monetary policy, market rates were likely to remain elevated enough to keep credit growth slowing, he believed.

Freya Beamish at Pantheon Macroeconomics was of a similar view, noting how at 15.3% for July the rate of growth in M1 money supply was pointing to some near-term support for the economy.

Beijing is likely to prop up growth in the third quarter through government spending, Beamish said, but concluded that: "But for [the PBoC on hold and higher fiscal spending] to translate into significant second round effects and more robust growth early next year, we would need to see it sustained. Instead, we think the PBoC will again be forced to allow domestic interest rates to climb in the remainder of 2017 as global markets realise how serious the Fed is about hiking rates. This will again put the dampener on credit and monetary conditions within China."

RBA CONCERNS

Minutes from the Reserve Bank of Australia (RBA) latest monetary policy meeting showed there continues to be concern about high levels of household debt, which may prevent the central bank from raising the interest rates any time soon, despite improved labour market conditions and wages recovery.

The Aussie dollar gained in Sydney as improved risk sentiment drove cash into the higher yielding currencies, noted analyst Ipek Ozkardeskaya at London Capital Group.

However, an aggressive sell-off in iron ore futures in China reversed the early inflows into the Aussie, she added, which later allowed fresh bets in short AUDUSD positions, justified by the dovish RBA statement. "The 0.79-resistance is in play."