Japan, China markets dent Asia as economic, political uncertainty drag

By Gregor Stuart Hunter SINGAPORE (Reuters) -Asian stocks fell on Friday as escalating U.S.-China economic tensions and uncertainty about political developments in Japan sapped investor confidence, while commodities took a breather after their recent charge higher. MSCI's broadest index of Asia-Pacific shares outside Japan fluctuated between gains and losses, and was last down 0.4% as its gains for the week evaporated after U.S. stocks ended the previous session with mild declines.  Shares in Hong Kong were down the most, off 1.8%, while the Australian market slid 0.1% against a backdrop of volatile commodity markets. In South Korea, stocks surged 1.4%, extending gains for the region's best-performing index. The yen strengthened 0.2% against the dollar and the Nikkei stock index tumbled 1%, easing off after sweeping to an all-time closing high on Thursday, as doubts began to emerge on whether prime minister-in-waiting Sanae Takaichi could repeat the pro-market policies of the late Shinzo Abe. Adding to the pressure, Japan's Komeito party will leave the ruling coalition led by the Liberal Democratic Party (LDP), public broadcaster NHK reported on Friday. "Political and economic conditions in Japan are quite different today than in 2012 when Abenomics was first launched," analysts at Alpine Macro wrote in a research report. "The lack of a parliamentary majority, an independent BOJ, and voters’ anger with higher inflation should prevent Takaichi from pursuing aggressive reflationary policies." U.S. stock futures found a bottom in Asia, with corporate earnings season for the third quarter due to kick off on Wall Street next week. S&P 500 e-minis were up 0.1%, while the U.S. dollar index, which measures the greenback's strength against a basket of six currencies, edged 0.1% lower, holding near a two-month high at 99.37. Chinese stocks tumbled, with the CSI 300 down 1.4% after Beijing expanded its rare earths export controls on Thursday, tightening control over the sector ahead of talks between Presidents Donald Trump and Xi Jinping.  Beijing also ramped up enforcement of its chip import restrictions, aiming to reduce domestic technology companies' dependence on U.S. products such as Nvidia's artificial intelligence processors, the Financial Times reported on Friday. Reuters could not immediately verify the report. The yield on the benchmark 10-year Treasury bond fell to 4.1247% compared with its U.S. close of 4.148% on Thursday. Traders' expectations that the Federal Reserve will ease policy at its meeting on October 29 remain solid, with Fed funds futures pricing a 94.6% probability of a 25-basis-point rate cut, according to the CME Group's FedWatch tool. Regional markets remain on track for one of their best years in a decade, firmly outstripping gains for U.S. counterparts as President Trump's package of economic policies and tariffs prompts a surge of orders across the region to meet booming demand for AI-linked technology hardware. "Despite strong performance this year and significant improvement in sentiment, positioning remains light, and flows are just returning," HSBC global head of market strategy Murat Ulgen wrote in a research report. TAKAICHI WALKS A TIGHTROPE Japan's TOPIX tumbled 1.9% after Finance Minister Katsunobu Kato voiced concern about "one-sided, rapid moves in the foreign exchange market" that have pushed the yen 3.5% weaker against the dollar since Takaichi's election this weekend.  Data earlier in the day showed wholesale prices rose 2.7% in the year to September, in a sign of persistent cost pressure that will keep markets braced for a possible rate hike by the Bank of Japan when it meets on October 30. The dollar slid 0.2% against the yen to 152.73, around the weakest level for the Japanese currency since February, after Takaichi said on Thursday that the country's central bank is responsible for setting monetary policy but that any decision it makes must align with the government's goal. Traders say her pledge to reassert government sway over the central bank may face a reality check from a weak yen and domestic political considerations, however.  "The market expects the Japanese government to adopt expansionary fiscal policies," analysts from Bank of America wrote in a research report. "However, considerable uncertainty remains about the specifics of the policies up for debate, as well as the extent of the fiscal expansion." COMMODITIES IN FOCUS Gold edged down 0.1% to $3,970.43, extending declines after snapping a four-day winning streak on Thursday, shortly after breaching the $4,000 mark for the first time and with evidence of the ebullience spilling across into other precious metals. Spot silver was up 1.7% at $49.94, retesting the $50 mark after crossing above the boundary for the first time on Thursday. [GOL/] In energy markets, Brent crude slid 0.5% to $64.92 per barrel, after Israel's government ratified a ceasefire with the Palestinian militant group Hamas on Friday, clearing the way to suspend hostilities in Gaza within 24 hours and free Israeli hostages held there shortly after that.  (Reporting by Gregor Stuart HunterEditing by Shri Navaratnam)

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