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Asian stocks briefly climbed to a fresh-two year high on Tuesday on the back of an overnight rise in Wall Street, while oil extended gains after major producers Saudi Arabia and Russia said supply cuts needed to continue into 2018.
But investors are growing increasingly wary of the broader market as valuations look stretched and with the latest rally taking place in thin volumes and led by just a few sectors. “We are approaching a short-term resistance as the breadth of this rise is very unhealthy and the market momentum looks tired,” said Alex Wong, a fund manager at Ample Capital Ltd in Hong Kong, with about $130 million under management.
In Hong Kong, the broader market rose to its highest level since June 2015 on the back of extended buying into Chinese lenders and market heavyweight Tencent before declining 0.6 per cent.
With overall volumes declining and share valuations looking extremely stretched, investors are growing cautious. Hong Kong's technology sector, for example, is the most expensive, trading at a price-to-earnings multiple of more than 42 times.
MSCI's broadest index of Asia-Pacific shares outside Japan edged down 0.1 per cent after hitting its highest level since June 2015 in opening trades. Australian stocks were among rare gainers in the region due to strength in commodity-linked shares.
Oil steadied above the $52 per barrel level after hitting its highest level in more than three weeks on Monday, after Saudi Arabia and Russia said that supply cuts needed to last into 2018, a step towards extending an OPEC-led deal to support prices for longer than first agreed.
Global benchmark Brent crude rose 0.4 per cent at $52 per barrel. US West Texas Intermediate (WTI) crude futures were up 0.4 per cent at $49.03 per barrel.
Brent crude has gained nearly 9 per cent over the last week though some analysts were sceptical about the durability of the rally despite the proposed supply curbs. “That is going to be easier said than done, it appears, with US production running at its fastest pace since August 2015 and data yesterday confirming that Chinese growth momentum continues to moderate,” ANZ strategists wrote in a daily note.
Chinese growth cooled in April according to a variety of economic indicators ranging from factory output to retail sales as authorities clamped down on debt risks in an effort to stave off a potentially damaging hit to the economy.
In currencies, the US dollar nursed deep losses after a weak U.S. manufacturing report trimmed expectations of a Federal Reserve rate increase next month, a key factor behind the dollar's gains in recent weeks.
The euro edged up 0.1 per cent to $1.0988 after gaining 0.4 per cent on Monday. The dollar eased 0.3 per cent against the yen near 113.47, after rising 0.4 per cent on Monday.
The dollar was steady at 98.83 against a trade-weighted basket of its peers after falling more than 1 per cent in the last three sessions.
The New York Federal Reserve's barometer on business activity in the state unexpectedly fell in May, sinking into negative territory for the first time since October. “I think people want to wait and see,” said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
Expectations of a rate increase in June fell to 74 per cent compared to 84 per cent last week, according to the CME Fedwatch.
A risk-on undertone meant gold posted meagre gains with the precious metal changing hands at $1,234 per ounce.
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