* Dollar treads water as rate increase bet shrinks slightly
* Oil extends gains on extension of supply cut hopes
By Saikat Chatterjee
HONG KONG, May 16 (Reuters) - Asian stocks 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 pledged to push for an extension of supply cuts into 2018.
Investors in regional equities, however, are growing increasingly wary as valuations look stretched and with the latest rally taking place in thin volumes and led by just a few sectors.
Regional stock markets were broadly mixed with Chinese stocks leading laggards and Thailand among the best performing stock market of the year. Europe is set to follow with index futures pointing to a mixed start.
“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 0.3 percent.
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 was flat after hitting its highest level since June 2015 in opening trades.
Oil steadied around 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 percent to $52 per barrel. U.S. West Texas Intermediate (WTI) crude futures were up 0.4 percent at $49.03 per barrel.
Brent crude has gained nearly 9 percent 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 U.S. 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 U.S. dollar nursed deep losses after a weak manufacturing report trimmed expectations of a Federal Reserve rate increase next month, a key factor behind the dollar’s gains in recent weeks.
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.
The euro edged up 0.2 percent to $1.0994 after gaining 0.4 percent on Monday. The dollar eased 0.3 percent against the yen to near 113.47, after rising 0.4 percent on Monday.
The dollar was steady at 98.83 against a trade-weighted basket of its peers after falling more than 1 percent in the last three sessions.
Expectations of a rate increase in June fell to 74 percent compared to 84 percent last week, according to the CME Fedwatch.
A risk-on undertone meant gold posted only meagre gains with the precious metal changing hands at $1,233 per ounce. (Additional reporting by Masayuki Kitano in Singapore; Editing by Eric Meijer & Shri Navaratnam)