Asia's Stocks Maintain Their Worldwide Surgeon Ukraine-Russia Talks.

On Wednesday, Asia's stock markets joined a worldwide surge as prospects for a negotiated resolution to the Ukraine crisis grew, but bond markets expressed anxiety about the US economy overnight when 10-year yields briefly fell below two-year rates.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) gained 1.28 percent to its highest level in over a month, with most Asian stock markets in the green and Chinese blue chips (.CSI300) leading the charge, up 2.5 percent.

However, Japan's Nikkei (.N225) defied the trend, losing 1%, as analysts pointed to profit-taking as the fiscal year came to a close. On Tuesday, the benchmark reached a two-month closing high.

Ukraine presented a neutral status as a sign of progress in face-to-face discussions on Tuesday, but on the ground, reports of strikes persisted, and Ukraine responded skeptically to Russia's commitment in negotiations to pull down military activities near Kyiv. more info

However, the euphoria seemed to be fading later in the day, as although US and European stocks had climbed substantially overnight, futures pointed to a weaker beginning on Wednesday.

The EURO STOXX 50 futures fell 0.18 percent, while the FTSE and S& P 500 futures were unchanged.

“On the one side, there has been more encouraging news surrounding Ukraine, and the market is optimistic of a peace settlement at some point, which is leading in a bit of a 'risk-on' event, with equities up,” said Shane Oliver, chief economist and head of AMP Capital's investment strategy.

“But then it's back to worrying about inflation and bond rates, and there's this argument over whether the United States would enter a recession as a result of the inversion of a portion of the yield curve.”

The widely followed US 2-year/10-year Treasury yield curve abruptly inverted on Tuesday for the first time since September 2019, as bond investors gambled that the Federal Reserve's relentless tightening may harm the US economy in the long run.

Longer-dated yields dropping below shorter-dated yields reflect a lack of confidence in future growth, and 10-year yields falling below 2-year rates are commonly seen as a sign of impending recession.

The difference between the yields on 3-month Treasury bills and 10-year notes, on the other hand, remained wider this month.

“The yield curve's signals are highly unclear,” Oliver added.

The benchmark 10-year yield in the United States was last weaker at 2.3615 percent, having surged as high as 2.557 percent on Monday, its highest since April 2019, as traders braced for a flurry of rate rises by the United States Federal Reserve.

The differential between the 10-year and 2-year rates in the United States was recently 3.4 basis points.

JAPAN IN PERSPECTIVE

Rising US rates are pulling Japanese government bond yields along with them, posing a danger to Japan's ultra-easy monetary policy.

On Wednesday, the Bank of Japan stepped up its efforts to protect its important yield cap, pledging to expand purchases of government bonds throughout the yield curve, even via unplanned emergency market operations.

While this demonstrated its commitment to the program, other observers questioned if the plan was long-term.

“I wouldn't be shocked if the Bank of Japan raises the 10-year JBG yield cap, which is presently fixed at 0.25 percent.” They can't afford to be too far behind the curve because if the yen falls below certain levels, it might generate market panic, said Jol Le Saux, fund manager of Eurizon Fund's Sustainable Japan Equity sub-fund.

The increasing yield disparity between the US and Japanese bonds has led the yen to fall dramatically, although it managed to recoup some of its losses on Wednesday.

The Japanese yen was trading at 121.95 per dollar, up from a low of 124.3 on Monday. Traders attributed the rebound to mounting worries that Japanese authorities will intervene to attempt to arrest the fall.

In other currency markets, the euro rose 0.2 percent to $1.1107, buoyed by expectations that negotiations between Russia and Ukraine may result in peace.

According to experts, supply constraints kept crude prices steady since the oil market was not ready to bet that the discussions will end the war and allow Western partners to lift sanctions against Russian oil exports.

Brent oil increased by 0.66 percent to $110.96 a barrel. Crude oil in the United States gained 0.7 percent to $104.97 per barrel.

The spot price of gold increased by 0.3 percent to $1920.6 per ounce.