Asian shares edged up while the Australian dollar and commodities pared early losses as investors bet China's latest interest rate hike would not change the optimistic outlook for the global economy in 2011.
People's Bank of China raised rates by 25 basis points on Saturday, the second rate rise in just over two months, as part of a series of measures designed to combat inflation which hit a 28-month high of 5.1 percent in November.
Our economists had expected a rate rise before the end of the year, but releasing the news on Christmas Day itself came as a little surprise to the market, said Chen Xin Yi, associate vice president at Barclays Capital in Singapore.
Nevertheless, we believe that the well-calibrated timing reflects consideration for minimizing unwanted financial market volatility and reducing potential capital movement to the extent possible.
The MSCI index of Asian stocks outside Japan rose 0.2 percent. Major markets such as Hong Kong and Australia remained closed.
The impact of today's rate move on the real economy's growth momentum is likely to be minimal. said Qian Wang, chief China economist at JP Morgan.
China's key stock index pared earlier gains and yuan forwards were modestly higher. The Shanghai Composite was down 0.3 percent, with weak small and mid-cap shares offsetting mild gains in banking and insurance shares.
Japan's Nikkei closed up 0.75 percent, extending its recent outperformance versus other Asian markets. The Nikkei is up over 10 percent this quarter versus a 5.4 percent rise for the MSCI Asia ex-Japan index.
Still, Japanese investors are entering 2011 in a bullish mood, raising equity holdings to a 10-month high, increasing exposure to high-yield credit and cutting back on government debt, Reuters polls showed last week.
S&P futures were a shade lower, down 0.2 percent.
FUNDAMENTALS SUPPORT COMMODITIES
Commodity markets pared early losses in response to an interest rate rise by PBOC, focusing instead on positive fundamentals and threats to supply.
U.S. wheat had dropped by more than 2 percent at the open before recovering to $7.81-3/4 a bushel, down 0.2 percent, while spot gold was trading flat after dropping to a one-week low of $1,371.1 earlier.
Crude oil futures reversed early falls, rising 0.3 percent to a two-month high.
The Australian dollar was flat after slipping in early trading on expectations that more tightening by China could prompt investors to sell the Aussie after the year-end break.
(Additional reporting by Nick Trevethan in SINGAPORE and Anotoni Slodkowski in TOKYO; editing by Kazunori Takada)