Asian stocks clung to early gains on Monday as the U.S. job market showed further signs of recovery, highlighting a brighter outlook for its economy, while the dollar firmed against a basket of other major currencies.
Markets in Korea <.KS11> and Japan <.N225>, which have fared better than their regional peers in a recent selling spree, led the gains, with the former trading just below a record high.
Japan has benefited from a shift into developed markets this year and generally strong corporate earnings, while South Korea is seeing stronger inflows as investors rotate out of last year's hot performing emerging markets in Southeast Asia.
The broader MSCI index of Asian stocks outside Japan <.MIAPJ00000PUS> rose 0.2 percent, as investors returned to pick up bargains after stocks dropped to a one-month low last Monday.
So far this year, Asian stocks have underperformed the MSCI world index <.MIWD00000PUS> by nearly three percentage points due to a variety of factors such as frothy valuations in some markets in South and Southeast Asia, profit taking on last year's gains and strong economic data out of the United States.
Investors pulled out $7 billion from Emerging Markets Equity Funds in the week of February 4, the biggest outflow in three years, data from fund tracker EPFR showed, putting a sizeable dent to record inflows seen in this category in 2010.
But indications that Asian authorities are demonstrating greater urgency in tackling inflation have made investors cautiously optimistic about the near-term outlook. Indonesia surprised markets on Friday by raising interest rates by a quarter point, its first rate increase since the end of the global financial crisis.
Policymakers are likely to adopt more administrative measures and front-load rate hikes as inflationary expectations continue to rise, Barclays Capital strategists said in a note.
Most Asian markets which were closed for the Lunar New Year holiday late last week reopened on Monday with the exception of China, where trading will not resume until Wednesday.
Boosted by Friday's data which showed a sharp drop in the U.S. jobless rate, the dollar was firm against a basket of currencies with markets growing wary of a reversal in its recent bearish trend after it bounced off multi-month lows against the euro last week.
Despite concerns that job growth was far less than expected, markets viewed the data positively.
The dollar index <.DXY>, which tracks the greenback against a basket of major currencies, was up briefly but remained well off a three-month low of 76.881 tested last Wednesday.
Reports of euro zone infighting over a French and German push for a comprehensive package of reforms to address the region's debt crisis also kept a lid on the euro.
Indeed, Credit Agricole said many of its Asian clients were skeptical about any signs of improved sentiment toward the eurozone's debt troubles.
Japanese government bond yields rose, reflecting a rise in U.S. Treasury yields with the 10-year yield hitting a nine-month peak above 1.295 percent, but losses were limited due to some mild bargain buying.
Traders are awaiting testimony by Federal Reserve Chairman Ben Bernanke before the U.S. House Budget Committee on Wednesday. A recent spate of encouraging economic data has begun throwing doubt on the prospects for the central bank extending its latest quantitive easing moves beyond mid-year.
U.S. crude futures recovered slightly to around $89 a barrel after falling nearly 2 percent on Friday though the focus remained firmly on Egypt's political crisis. Brent crude stayed above the $100 level.
The Egyptian government opened talks with the opposition at the weekend to resolve the country's deepest crisis in 30 years, but it was far from certain the situation had been defused.
(Additional reporting by Ian Chua in Sydney and Vikram Subhedar; Editing by Kim Coghill)