HONG KONG, Sept 29, 2022 (BSS/AFP) - Asian stocks rallied Thursday as UK and US government yields fell after the Bank of England jumped into bond markets to prevent a fresh financial catastrophe.

However, the pound -- which earlier this week hit a record low against the dollar -- struggled to hold its advance against the greenback, with commentators warning it could face further pain.

Financial markets are being hammered as central banks around the world ramp up interest rates to tackle runaway inflation, fuelling worries about a recession and a possible hit to company profits.

And the selling picked up this week after new UK finance minister Kwasi Kwarteng unveiled a tax-cutting mini-budget Friday, which many experts including the International Monetary Fund warned would fan borrowing and deal a further blow to the already fragile economy.

The spending plan sent yields on UK government bonds, as well as those of other countries, soaring and raised the prospect of even bigger interest rate hikes.

That led the Bank of England on Wednesday to announce a two-week programme to spend o65 billion ($71 billion) buying long-dated UK bonds "to restore orderly market conditions".

The move meant the BoE had to suspend a programme to sell "gilts" as part of its drive to fight inflation, though analysts speculated that it could give traders some hope that similar support could be provided elsewhere.

National Australia Bank's Ray Attrill said traders had grown accustomed to the fact that central banks were not ready to simply help asset markets when they drop in response to inflation-fighting measures.

But now there was an understanding that "when markets become dysfunctional with potential real world economic consequences, central banks' financial stability obligations can still kick in".

All three main indexes on Wall Street surged around two percent Wednesday, while European markets were also up.

And Asia extended the gains, though the initial surge was beginning to wane as the day wore on.

Hong Kong, Sydney, Seoul, Singapore, Wellington and Manila were all up more than one percent, while Tokyo, Shanghai, Taipei and Jakarta were also in positive territory.
However, the pound was weakening again sitting just below $1.0800, having spiked at $1.0900 earlier, as the dollar remained the go-to unit owing to Fed plans to lift rates further this year.

OANDA's Edward Moya warned of more rough seas for sterling.

"The British pound went on a little roller coaster ride following the BoE action to buy unlimited long-dated gilts, but will still probably remain heavy over the country's fiscal situation, current account deficit, financial stability risks, and energy poverty likelihood for parts of the population," he said in a note.

The uptick across markets, however, was rare and the general mood on trading floors remains dark as the Fed and other central banks zero in on hiking borrowing costs to fight decades-high inflation.

"All eyes are on inflation and interest rates," said Josh Emanuel at Wilshire. "Equities are really going to take their cues from bond markets. So if you see bond yields move lower, that is a good sign for equities."

And Julia Raiskin, at Citigroup, added that "markets are very pessimistic... Other than the dollar, there are not many assets that are trading constructively."

- Key figures at around 0230 GMT -

Tokyo - Nikkei 225: UP 0.3 percent at 26,238.32 (break)

Hong Kong - Hang Seng Index: UP 1.3 percent at 17,477.77

Shanghai - Composite: UP 0.5 percent at 3,060.83

Pound/dollar: DOWN at $1.0789 from $1.0889 on Wednesday

Euro/dollar: UP at $0.9638 from $0.9735

Euro/pound: UP at 89.68 from 89.39 pence

Dollar/yen: UP at 144.30 yen from 144.11 yen

West Texas Intermediate: DOWN 0.4 percent at $81.84 per barrel

Brent North Sea crude: DOWN 0.4 percent at $89.00 per barrel

New York - Dow: UP 1.9 percent at 29,683.74 (close)

London - FTSE 100: UP 0.3 percent at 7,005.39 (close)