* China hikes short-term rates, hitting riskier assets
* Trump trade hits pause button
* Strong U.S. jobs data may force Fed's hand
* Oil edges higher as geopolitical tensions rise
By Saikat Chatterjee
HONG KONG, Feb 3 Chinese stocks slumped on
Friday, sending Asian markets skidding for their biggest losses
in two weeks after Beijing unexpectedly raised short-term
interest rates, adding to growing concerns about U.S. President
Donald Trump's aggressive policies.
European stocks are expected to take Asia's lead with major
bourses set to open in the red before a key U.S. jobs report
sheds further light on the outlook for U.S. monetary policy in
the coming months.
On the first day of trading after a week-long break for the
Lunar New Year, Chinese equities tumbled and the currency
weakened after the People's Bank of China raised the interest
rates on open market operations by 10 basis points.
Two banking sources also told Reuters it had raised the
lending rates on its standing lending facility (SLF) short-term
loans, suggesting policymakers were tugging multiple levers to
slow down a rampant build-up in debt among Chinese corporates.
"My interpretation of the higher interest rates in China is
that the regulator does not want corporates to over-leverage,
which could be the case if borrowing cost is low together with
ample liquidity," said Iris Pang, senior economist, greater
China at Natixis in Hong Kong.
The latest increases in market interest rates comes after
the central bank raised rates on its medium-term loan facility
(MLF) in late January. That was the first time it has raised one
of its policy interest rates since July 2011.
Analysts say the fresh increases mark a step up in policy
tightening for domestic markets and appears to be aimed at
bolstering the yuan after record capital outflows in recent
months. The Institute of International Finance estimated capital
outflows from China surged last year to a record $725 billion.
"The signal is very clear," said Zhou Hao, senior emerging
market economist, Asia, for Commerzbank in Singapore. "I think
it's targeted tightening compared to the last cycle in
Chinese yields snapped a three-year declining trend in late
October with five-year benchmark yields rising by 65
basis points since then. Ten year yields have surged
by a greater magnitude. They extended their rise on Friday.
TRUMP TRADE TOP
The China news couldn't have come at a worse time for risky
assets just as a rally in U.S. equities and the dollar - the
so-called "Trump trade" - showed further signs of fizzling, hurt
by anxiety about the Trump administration's tough stance on
immigration, trade and aggressive posturing in international
MSCI's broadest index of Asia-Pacific shares outside Japan
was down 0.3 percent, pulling back from a
three-month peak hit in the previous session. Australian
and Japanese markets were down, while others were steady
to slightly lower.
"I think the Trump trade has hit the pause button with both
equity and credit markets currently factoring in a very rosy
view of the U.S. economy and we need to see more evidence from
the policy front before further gains are justified," said Cliff
Tan, East Asia head of global markets research at Bank of Tokyo
Mitsubishi UFJ in Hong Kong.
The S&P 500 settled at levels around six weeks ago, losing
steam due to lingering investor anxiety around Trump's policies.
Markets had run up sharply following Trump's Nov. 8 election
win on the expectation that tax cuts, deregulation and a fiscal
stimulus would accelerate economic growth.
Adding to concerns is whether the Fed would switch gears to
a more hawkish stance if jobs data continued to surprise on the
upside with some analysts penciling in a March rate increase if
payrolls data, due later in the day, surprised on the upside.
Futures were predicting a move only by June.
According to a Reuters survey of economists, nonfarm
payrolls probably increased by 175,000 jobs last month, picking
up from the 156,000 jobs added in December. The unemployment
rate is expected to be unchanged at 4.7 percent in January, near
a nine-year low.
In currency markets, the dollar was pinned near its weakest
level against a basket of major rivals since mid-November
amid uncertainty about the Trump's administration mixed comments
on the greenback.
Against yen, however, the dollar managed to find its feet
after the Bank of Japan offered to buy Japanese government bonds
in a surprise operation aimed at bringing down bond yields. The
dollar was up 0.2 percent against the yen at 113.
"The yen might continue to weaken against the dollar after
today's action," said Masashi Murata, senior currency strategist
at Brown Brothers Harriman.
Bonds were steady with ten-year U.S. Treasury yields
holding firm at 2.5 percent. Credit markets remained
upbeat with an index measuring performance of Asian debt
denominated in U.S. dollars holding firm near
Oil prices edged higher as investors grew wary that the U.S.
may impose new sanctions on multiple Iranian entities, firing
geopolitical tensions between the two nations.
Brent crude futures had risen 0.5 percent, to $56.82
a barrel by 0123 GMT, after settling down 24 cents at $56.56 in
the previous session.
(Additional reporting by TOKYO markets team; Editing by Shri