TOKYO (REUTERS) - Asian shares started the week on a cautious note on Monday (March 13) as strong US jobs data cemented expectations of a hike in US interest rates this week and as oil prices plunged to 3-month lows on fresh worries of oversupply.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat, with a fall in resource-heavy Australian shares offset by a rise in tech-heavy South Korean shares.
Japan's Nikkei inched lower, with the mood also soured by an unexpected drop in machinery orders, which highlighted the fragility of the country's economic recovery.
Global stocks rose on Friday, with the MSCI's index of 46 markets gaining 0.5 per cent, snapping six straight days of losses after the robust US jobs report.
Yet while the data all but sealed a rate increase by the Federal Reserve on Wednesday, the market's focus now shifting to the pace of rate hikes beyond March.
"The markets are focusing on when the Fed will raise rates next time or the pace of its rate hike, so the tone of Fed chair Janet Yellen will be closely watched," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.
US interest rate futures are pricing in about a 50 per cent chance of another rate hike in June. By the end of 2017, a total of nearly three hikes were fully priced in, including the likely move in March.
In Reuters poll of primary dealers, twelve of the 23 dealers saw a rate increase to 1.00-1.25 per cent by the June 13-14 meeting, while 10 expected such a move by the Fed's September meeting.
The 10-year US Treasuries yield slipped a tad on Friday partly as markets had already expected strong payroll figures.
Still, it last stood at 2.584 per cent, not far from its two-year high of 2.641 per cent touched on Dec 15.
US junk bonds have also faltered, with high-yield bond ETF posting its biggest weekly loss in more than a year.
Global bond prices came under pressure also following a report that some European Central Bank policymakers had discussed the possibility of rate hikes before the end of its quantitative easing programme.
The 10-year German Bund yield rose to 0.496 per cent on Friday, near its one-year high of 0.498 per cent hit in January.
A break of those previous peaks in major bond yields could spark a fresh sell-off in global bond markets.
The talk of ECB rate hike, even though it is still seen as a remote possibility, helped to lift the euro.
The single currency traded at US$1.0690, after hitting a one-month high of US$1.06995 on Friday.
The dollar slipped to 114.85 yen from Friday's six-week high of 115.51 yen after US Commerce Secretary Wilbur Ross said on Friday that Japan will be on high on the US priority list for trade agreements.
Traders suspect Washington, keen to reduce its trade deficit, may put pressure on Japan not to cheapen the yen in upcoming bilateral economic talks.
Oil skidded to 3-month lows after posting biggest three-day loss in a year by Friday as investors continued to flee bullish positions on worries that Opec-led production cuts have not yet reduced a global glut of crude.
US crude futures dropped 1 per cent to US$47.96 per barrel , having shed more than 11 per cent so far this month.