SINGAPORE, Oct 25 — Asian equities fell to new 2-1/2-year lows today as early gains inspired by a rally on Wall Street on hopes the Federal Reserve could be nearing the end of aggressive rate increases were offset by weakness in Chinese shares and the yuan.

The US dollar eased against major peers, while the sterling took aim at this month’s highs after Rishi Sunak was set to become Britain’s next prime minister, seeking to restore stability to a country reeling from years of political and economic turmoil.

Sterling strengthened 0.3 per cent to US$1.13170, heading toward the high this month of US$1.1493 from October 5. USD/

Equities were mixed in Asia, with Japan’s advancing 0.7 per cent and South Korea .KS11 rising 0.3 per cent but Taiwan was down 0.7 per cent and Hong Kong .HSI shed 0.6 per cent.

MSCI’s broadest index of Asia-Pacific shares lost 0.4 per cent to 428.2 after dipping to 427.4 , the lowest since April 2020.

ING economists noted widespread weakness in the Purchasing Managers’ Index (PMI) published yesterday across the developed markets. But they said that "perhaps the sharp decline in the US service sector PMI is a silver lining in this bad news if it means slower Fed hikes and perhaps a lower peak Fed funds rate?”

"This could be one reason that equity markets are finding some support,” they added.

The Asian benchmark is nursing losses of nearly 32 per cent so far this year, weighed by big falls in Hong Kong shares while emerging markets such as India and Indonesia have gained on improving growth prospects.

However, Chinese stocks fell further today after Xi Jinping’s new leadership team raised worries that a more powerful Party leadership will increasingly prioritise the state at the cost of the private sector.

The mainland Chinese benchmark index shed 0.6 and the offshore yuan tumbled to yet another record low against the dollar, weakening to as much as 7.3650 per dollar.

Sentiment had already been affected by delayed data on gross domestic product (GDP) showing the Chinese economy grew 3.9 per cent in the third quarter, beating forecasts of 3.5 per cent, but retail sales disappointed with a meagre rise of 2.5 per cent.

China’s onshore yuan slid to a near 15-year low, after the central bank set the lowest mid-point since 2008 following Monday’s sell-off in Chinese assets.

Yesterday, US shares extended last week’s rally and European shares climbed s signs of a cooling US economy stoked hopes that the Federal Reserve will slow its pace of rate hikes.

The Dow Jones Industrial Average rose 1.34 per cent, the S&P 500 gained 1.19 per cent and the Nasdaq Composite added 0.86 per cent.

US business activity contracted for a fourth straight month in October, suggesting the Fed’s barrage of steep interest rate increases is having the desired effect.

Markets are still priced for a rate rise of 75 basis points next month, but have scaled back bets on a matching move in December.

The funds rate was expected to peak at 4.50 per cent-4.75 per cent or higher in Q1 2023, according to 49 of 80 economists in a Reuters poll.

The European Central Bank meets this week and is widely expected to raise rates by 75 basis points.

In commodities markets, gold prices rose 0.1 per cent to US$1,650.6 per ounce, while benchmark Brent crude futures were steady at US$93.2 per barrel. — Reuters