A clerk counts Chinese 100 yuan banknotes at a branch of China Construction Bank in Hai'an, Jiangsu province in this June 10 2014 file photo. Picture: REUTERS
A clerk counts Chinese 100 yuan banknotes at a branch of China Construction Bank in Hai'an, Jiangsu province in this June 10 2014 file photo. Picture: REUTERS

Sydney — Stocks across Asia advanced on Monday as China’s efforts to stop sharp declines in its currency and capital flight supported wider sentiment in the region, although the escalating US-China trade conflict has capped gains.

Late on Friday, the People’s Bank of China raised the reserve requirement on some foreign exchange forward positions, making it more expensive to bet against the Chinese currency and helping pull the yuan away from 14-month lows.

The move boosted the Australian dollar, which is often played as a liquid proxy for the yuan. The Aussie came off two-week lows to climb as high as $0.7412 after the announcement, and was last at $0.7403.

"Leaning against bearish yuan sentiment is important because a rapidly weakening currency risks triggering residential outflows and destabilising domestic asset prices," JPMorgan analysts said in a note.

"Our economists think the PBOC will probably take further action if yuan depreciation continues or capital outflow pressure increases."

On Monday, MSCI’s broadest index of Asia-Pacific shares outside Japan leapt 0.9% — its biggest jump in a month and its second straight session of gains.

Japan’s Nikkei edged up 0.4%, while Australian shares added 0.75%. Chinese shares were positive too, with the blue-chip share index up 0.5%. Hong Kong’s Hang Seng index gained 1.3%.

On Friday, the Dow Jones industrial average climbed 0.54%, the S&P 500 gained 0.46% and the Nasdaq composite added 0.12%.

They were helped by strong corporate earnings, although gains were capped by worries over the escalating trade tensions.

The trade dispute remains a live issue for markets with China proposing tariffs on $60bn worth of US goods on Friday, while a senior Chinese diplomat cast doubt on prospects of talks with Washington to resolve the bitter trade conflict.

That was followed by a report in China’s state media saying Friday’s retaliatory tariffs were "rational" while accusing the US of blackmail.

At the same time, US President Donald Trump said his strategy of placing steep tariffs on Chinese imports is "working far better than anyone ever anticipated", citing losses in China’s stock market. He predicted the US market could "go up dramatically" once trade deals were renegotiated.

According to Bespoke Investment Group, mentions of tariffs in S&P 500 company earnings reports for the second quarter have more than doubled from the first quarter of this year.

Other factors too are weighing on investor sentiment.

"While the possibility of a trade war is still top of mind for investors, it isn’t the only cause for concern," said Lachlan McPherson, Senior Investment Consultant at Charles Schwab Australia.

"Investors are also closely watching the rising value of the US dollar, slowing global economic growth and the risk of the Federal Reserve tightening short-term interest rates too quickly and dampening domestic economic growth."

The dollar index, which measures the greenback against a basket of six other currencies, has risen 3.4% so far this year with strong rallies since April when Trump first announced the tariffs. The index was last up 0.1% at 95.26.

Traders see further upside in the dollar as they maintained a significantly large long position on the currency, while net short bets on the Aussie were their largest since November 2015.

The British pound held at $1.30 after falling to an 11-day low of $1.2975 following remarks by Bank of England governor Mark Carney that Britain faced an "uncomfortably high" risk of a "no deal" Brexit.

The euro inched down to more than five-week lows of $1.1573.

Gold bounced from near 17-month lows after weaker than expected US jobs data, and was last up 0.3% at $1,216.45.

Meanwhile, Brent crude futures rose 41c to $73.62, while US crude oil futures added 34c to $68.82 a barrel.

Reuters