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GLOBAL MARKETS-Japanese shares lead Asia rally as Yellen effect holds sway

Wayne Cole
Thursday, 14 Nov 2013 | 10:18 PM ET

* Asian markets cheered as Fed's Yellen sounds in no hurry to taper

* Japan shares aiming for biggest weekly gain since late 2009

* Dollar pushes above 100 yen, euro eases back

SYDNEY, Nov 15 (Reuters) - Asian share markets rallied on Friday as investors took comfort in the prospect of extended U.S. monetary stimulus, while a falling yen had Japanese stocks gunning for their biggest weekly increase in almost four years.

The Nikkei jumped 1.8 percent early Friday to bring its gains for the week so far to a heady 7.5 percent, its best performance since December 2009. It also cracked major chart resistance around 15,000, which opened the way for a return to the May peak at 15,942.60.

Markets across the region joined the celebration, first sparked by a dovish slant on policy from presumptive head of the Federal Reserve, Janet Yellen.

"The market is flourishing from a 'Yellen effect', soothing worries about liquidity to bring back foreign inflows," said Kim Hak-gyun, a market analyst at KDB Daewoo Securities.

Seoul's KOSPI climbed 1.9 percent and was on track for its largest gain in four months. Shares in Shanghai rose 1.9 percent, while Australia added 0.8 percent.

MSCI's broadest index of Asia-Pacific shares sped ahead by 1.1 percent for a second day of gains.

Wall Street reached record highs on Thursday after Yellen robustly defended the central bank's bold steps to spur economic growth, calling efforts to boost hiring an "imperative" at a hearing into her nomination.

The Dow ended 0.35 percent higher, while the S&P 500 gained 0.48 percent. The Nasdaq was restrained by Cisco Systems Inc after disappointing results knocked 10 percent off its share value.

"Yellen still believes the benefits of QE outweigh the costs-- a little tidbit that could have been the most important thing she said market-wise," said William O'Donnell, chief U.S. government bond strategist at RBS Securities in Stamford, Connecticut.

"She did not strike me, or our economics squad, as somebody ready to roll back on QE3 and that even another 200,000-plus print in the next nonfarm payroll number may not sway her."

One result is that the Fed finally seems to be convincing markets that even if it does taper, an actual increase in the official funds rate will still be distant. Short-term debt markets rallied hard as investors pushed the timing of the first hike far into the future.

LOW FOR LONGER

Indeed, there has been a radical reappraisal on the outlook for tightening since the Fed skipped a chance to start tapering in September. Back then futures on the Fed funds rate had implied a first hike in late 2014. Now a move to 0.5 percent is not fully priced in until November 2015.

In just the past couple of days Eurodollar futures have rallied so sharply that they now predict the cost of borrowing dollars will stay near zero out to 2016.

That in turn has helped drag down Treasury yields, with rates on two-year notes at just 29 basis points compared to a peak of 54 in early September.

For once the decline in yields did not trouble the U.S. dollar too much, in part because rates in Europe were falling even more following another disappointing economic report.

Data showed the euro zone only just emerged from recession in the third quarter with growth of a miserly 0.1 percent as France contracted.

The euro was off at $1.3450 after getting as high as $1.3497 on Thursday.

Neither were there any signs the Bank of Japan would be diverted from its massive stimulus efforts with data showing the economy slowed markedly last quarter as consumers and businesses proved reluctant to spend.

Yen bears also got traction on Thursday after Finance Minister Taro Aso told a parliamentary committee Japan must retain currency intervention as a policy tool.

The dollar has been making steady gains on the yen for three weeks now to finally breach the 100.00 barrier. It was now enjoying the view at 100.27 yen, having bounced from a low of 99.11 on Thursday.

In commodity markets, Brent crude oil rose a third straight on worries about crude supply disruptions in Libya, while gold drew some comfort from the prospect of continued U.S. stimulus.

Brent for December delivery was up 8 cents at $108.36 a barrel, while U.S. crude added 39 cents to $94.15. Spot gold edged up to $1,289.16 an ounce and away from the week's trough of $1,260.89.