On the first day of trading after a week-long break for the Lunar New Year, Chinese equities skidded and the currency weakened after the People's Bank of China raised the interest rates on open market operations by 10 basis points.
Two banking sources also told Reuters it had raised the lending rates on its standing lending facility (SLF) short-term loans, suggesting policymakers were tugging multiple levers to slow down a rampant build-up in debt among Chinese corporates.
"My interpretation of the higher interest rates in China is that the regulator does not want corporates to over-leverage, which could be the case if borrowing cost is low together with ample liquidity," said Iris Pang, senior economist, greater China at Natixis in Hong Kong.
The latest increases in market interest rates comes after the central bank raised rates on its medium-term loan facility (MLF) in late January. That was the first time it has raised one of its policy interest rates since July 2011.
Analysts say the fresh increases mark a step up in policy tightening for domestic markets and appears to be aimed at bolstering the yuan after record capital outflows in recent months. The Institute of International Finance estimated capital outflows from China surged last year to a record $725 billion.
"The signal is very clear," said Zhou Hao, senior emerging market economist, Asia, for Commerzbank in Singapore. "I think it's targeted tightening compared to the last cycle in 2010-2013."
Chinese yields snapped a three-year declining trend in late October with five-year benchmark yields rising by 65 basis points since then. Ten year yields have surged by a greater magnitude. They extended their rise on Friday.
TRUMP TRADE TOP
The China news couldn't have come at a worse time for risky assets just as a rally in U.S. equities and the dollar - the so-called "Trump trade" - showed further signs of fizzling, hurt by anxiety about the Trump administration's tough stance on immigration, trade and aggressive posturing in international relations.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 percent, pulling back from a three-month peak hit in the previous session. Australian and Japanese markets were down, while others were steady to slightly lower.
"I think the Trump trade has hit the pause button with both equity and credit markets currently factoring in a very rosy view of the U.S. economy and we need to see more evidence from the policy front before further gains are justified," said Cliff Tan, East Asia head of global markets research at Bank of Tokyo Mitsubishi UFJ in Hong Kong.
The S&P 500 settled at levels around six weeks ago, losing steam due to lingering investor anxiety around Trump's policies.
Markets had run up sharply following Trump's Nov. 8 election win on the expectation that tax cuts, deregulation and a fiscal stimulus would accelerate economic growth.
Adding to concerns is whether the Fed would switch gears to a more hawkish stance if jobs data continued to surprise on the upside with some analysts penciling in a March rate increase if payrolls data, due later in the day, surprised on the upside. Futures were predicting a move only by June.
According to a Reuters survey of economists, nonfarm payrolls probably increased by 175,000 jobs last month, picking up from the 156,000 jobs added in December. The unemployment rate is expected to be unchanged at 4.7 percent in January, near a nine-year low.
In currency markets, the dollar was pinned near its weakest level against a basket of major rivals since mid-November amid uncertainty about the Trump's administration mixed comments on the greenback.
"The dollar has been pulled down by fear, in markets, given all the headlines," particularly those about Iran," said Jennifer Vail, head of fixed-income research for US Bank Wealth Management in Portland, Oregon.
Bonds were steady with ten-year U.S. Treasury yields holding firm at 2.49 percent. Credit markets remained upbeat with an index measuring performance of Asian debt denominated in U.S. dollars holding firm near three-month highs.
Oil prices edged higher as investors grew wary that the U.S. may impose new sanctions on multiple Iranian entities, firing geopolitical tensions between the two nations.
Brent crude futures had risen 0.8 percent, to $56.77 a barrel by 0123 GMT, after settling down 24 cents at $56.56 in the previous session. - Reuters
Did you find this article insightful?