Asia stocks rally as fears of Russia invading Ukraine ease

Asian shares rallied on Wednesday as fears of a Russian invasion of the Ukraine this week dissipated after Moscow indicated it was returning some troops to base from exercises, delivering investors a measure of relief.

The tension between world powers over the Ukraine situation, which has developed into one of the deepest crises in East-West relations for decades, has been front-and-centre of investors` minds.

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MSCI`s broadest index of Asia-Pacific shares outside Japan surged 0.9% in early regional trade on Wednesday, playing catch-up with a rally in U.S. and European stocks on Tuesday.

"If we continue to see signs that diplomacy is working and a de-escalation of tensions, I think we`ll see a kind of reversal trade," said Kyle Rodda, a market analyst at IG in Melbourne.

"We`ll probably see stocks boosted on the fact that implied volatility is a little bit lower," Rodda said, adding that it would likely weigh on oil and gold prices.

Japan`s Nikkei soared 1.9% to rebound from two days of falls, while Australia`s S&P/ASX200 gained half a percent.

Elsewhere in the region, Hong Kong`s Hang Seng Index jumped 1.1% early in the session, and China`s CSI300 Index was up 0.4%.

Investors` attention was likely to turn to economic and monetary policy developments amid ongoing speculation the U.S. Federal Reserve might raise rates by a full 50 basis points in March.

Among events in focus, was the release of the minutes from the Federal Reserve`s January policy meeting later on Wednesday as well as January consumer inflation data from the United Kingdom and Canada.

China`s factory-gate and consumer price inflation both came in lower than expected in January, data on Wednesday showed.

The tension surrounding the Ukraine situation has "distracted from the fact there are still major risks and concerns about global monetary policy and how that could affect financial markets," IG`s Rodda said.

"That could resurface as a driver for volatility as geopolitical tensions ease a little bit."

The yield on benchmark 10-year Treasury notes was at 2.0311% compared with its U.S. close of 2.056% on Tuesday. The two-year yield, which goes up with traders` expectations of higher Fed fund rates, was at 1.5569% compared with a U.S. close of 1.5774%.

Currency markets were pretty quiet, with the dollar index holding steady at 96.009 after pulling back from a two-week high on Tuesday after the Ukraine geopolitical risk premium came out of the market. [FRX/]

"Expectations of an aggressive Federal Reserve hike cycle should keep a base for the DXY in place," analysts at Westpac said in a note.

The yen traded at 115.67 per dollar.

U.S. crude was down a notch at $91.98 a barrel after pulling back from a seven-year high hit on Monday. Brent crude was down 0.1% at $93.16 per barrel.

Gold was slightly lower. Spot gold was traded at $1,850.54 per ounce. [GOL/]