Asian shares cap strong week on soft note, bonds enjoy relief rally

SYDNEY, May 16 (Reuters) – Asian stocks were set to end a strong week on a softer note on Friday as the euphoria over U.S.-China trade talks faded, while firmer bets for policy easing in the United States sparked a rally in beaten-down bond markets.

Oil prices steadied after plunging over 2% overnight on news of a potential U.S.-Iran nuclear deal, but they are still up 1% for the week as the global economic outlook brightened.

European shares are bracing for a similarly subdued open with little data or events scheduled later in the day to provide a clear catalyst. EUROSTOXX 50 futures were mostly flat while Wall Street futures were also little changed.

It has been a strong week for global share markets as investors cheered the trade war truce between the United States and China, which has greatly lessened the chance of a global recession. However, there was enough prevailing uncertainty to keep investors cautious heading into the weekend.

Traders went back to selling the dollar on Friday, with the U.S. currency falling 0.3% on the Japanese yen and slipping 0.2% on the Swiss franc . The Australian dollar also gained 0.4% while the kiwi rose 0.5%.

“The markets confront a weekend with less risk of carrying open positions than last, with no major trade talks or significant risks on the calendar,” said Kyle Rodda, senior analyst at Capital.com.

“However, there is always a slight risk-off bias going into the weekend during a Trump presidency, with a nasty downside surprise at the Monday open only ever one social media post away.”

The MSCI’s broadest index of Asia-Pacific shares outside Japan was flat at 613.7 on Friday but it is still set for a weekly rise of over 3%. Goldman Sachs raised its 12-month target for the Asian index to 660, from 620 before.

Hong Kong’s Hang Seng index fell 0.6%, dragged down by an almost 5% slump in tech giant Alibaba after its quarterly revenue failed to impress investors. Their U.S.-listed shares had already tumbled 7.6% overnight.

Japan’s Nikkei  trimmed earlier losses and were last flat after data showed its economy shrank for the first time in a year in the March quarter, underscoring the fragile nature of its recovery now under threat from U.S. trade policies.

Warning of the risks to the economy from U.S. tariffs, Bank of Japan board member Toyoaki Nakamura said the central bank must hold off raising interest rates for the time being.

Swaps imply scant prospects of a move until much later in the year, with a quarter-point hike in October priced at a 50:50 chance .

On Wall Street, U.S. core retail sales were soft and the producer prices fell unexpectedly in April, as markets added to the bets for a total easing of 56 basis points from the Federal Reserve this year, from 49 bps before.

That helped Treasuries rally after a brutal week. The benchmark ten-year yields fell 3 basis points to 4.422% on Friday, having already dropped 7 bps overnight to move away from its one-month top.

For the week, they are still up 8 bps.

The two-year yields were also down 3 bps to 3.945%, having fallen 8 bps overnight.

Fed Chair Jerome Powell said on Thursday that policymakers felt they need to reconsider the key elements around both jobs and inflation in their current approach to monetary policy.

So far, U.S. price data have looked benign, but it might be just a matter of time before the tariff impact starts to show up in the hard data. Walmart, the world’s largest retailer, said it would have to start raising prices later this month due to the high cost of tariffs.

In commodities markets, oil prices steadied. U.S. crude futures bounced 0.1% to $61.71 a barrel while Brent was at $64.61 per barrel, also 0.1% higher on the day.

In precious metals, gold prices fell 0.7% to $3,217 an ounce, after rallying 2% overnight. For the week, they are down 3.2%.