Sydney: Asian markets were thrown a lifeline on Thursday when surprisingly strong data on China's huge manufacturing sector helped offset rising U.S. bond yields, lifting currencies and shares from deep early lows.
Assets across the region had been under heavy pressure after minutes from the Federal Reserve's July policy meeting showed it was still on track to start tapering stimulus as early as next month, sending Treasury yields to two-year highs.
But hopes for a pick-up in China were rekindled when HSBC said its preliminary purchasing managers' index rose to 50.1 in August, a five-month high and just above the 50 level that separates growth from contraction.
"This is mainly driven by the initial filtering-through of recent fine-tuning measures and companies' restocking activities, despite the continuous external weakness," said Hongbin Qu, chief China economist at HSBC.
"We expect further filtering-through, which is likely to deliver some upside surprises to China's growth in the coming months."
The prospect of an improvement in the world's second biggest economy helped Shanghai shares recoup early losses to trade 0.4 percent firmer. Japan's Nikkei clawed its way back to flat having been down over 1.3 percent.
Also helping was a Reuters poll showing Japanese manufacturers' optimism improved to the highest level in three years, as a weak yen boosted earnings for exporters of textiles, chemicals, steel and other metals.
Elsewhere in the region shares were still down, but off their lows. The MSCI's index of Asia-Pacific shares outside Japan was 0.7 percent easier, while Korean stocks halved their losses to be down 0.5 percent.
The Philippine market, which had been closed by bad weather the last few days, caught up with the action by shedding 6.6 percent.
The upbeat Chinese news also helped lift the Australian dollar half a cent to USD0.8990. Around 70 percent of Australia's exports go to Asia and its currency is free- floating and liquid, so investors often use it as a proxy against emerging market risk.
Other currencies in the region also benefited, though most remained down on the day. Malaysia's ringgit fell to its lowest in more than three years before steadying somewhat at 3.3145 per dollar.
WATCHING US YIELDS
Markets from India to Indonesia have been under intense stress from expectations Western investors will repatriate funds now that yields at home are rising.
Expectations of economic recovery in the United States and Europe also tends to make assets there more attractive, heightening the competition for global savings.
The prospect of the Fed tapering its stimulus in the next few months sent 10-year U.S. Treasury yields up to 2.92 percent, a level last seen in July 2011. The break of a major chart bulwark at 2.90 percent could see the market quickly test 3 percent, which itself is a huge psychological marker.
Treasury yields tend to set the benchmark for borrowing costs across the globe, so the rise will make it more difficult for indebted countries and companies to pay their bills.
"Given that the recent capital outflows have been mainly triggered by yield differentials, the higher Treasury yields mean that there is unlikely to be a quick turnaround in Asian currencies, especially those economies with current account deficits," said Frances Cheung, a strategist with Credit Agricole in Hong Kong.
She listed India, Indonesia, Malaysia and Thailand as the most vulnerable. "The story about capital outflows could persist for a while."
The prospect of further increases in U.S. yields gave the U.S. dollar a lift across the board. The euro was back at USD1.3338, from a high of USD1.3452 on Wednesday, while the dollar pushed higher to 98.20 yen.
The dollar index, which measures the greenback versus a basket of six currencies, rose to 81.493, from a low of 80.896.
Commodities rallied in the wake of the Chinese data. Gold was hovering at USD1,364.36 an ounce and copper bounced 1 percent to USD7,332.0 a tonne.
U.S. crude oil futures were off a slim 6 cents at USD103.78 a barrel, while Brent crude oil eased 22 cents to USD109.59.