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Hong Kong led a broad rally in Asian markets on Friday, with the Hang Seng index jumping nearly 3% in its final hour of trade. Investors shook off losses earlier in the week, focusing instead on key economic data out of Japan and progress on U.S. spending negotiations.

The rebound comes after a three-day slide for most regional indexes. Strong gains in Hong Kong helped offset small declines in Japan, making it the sole loser among major Asian markets.

Hong Kong Rallies on Consumer and Real Estate Stocks

The Hang Seng index was up 2.45% by mid-afternoon, erasing losses from the previous session. The strong performance was driven by big gains in consumer cyclical and real estate stocks.

Top gainers included Alibaba Health, which provides an online medical platform and rose nearly 8%, along with sportswear brand Li Ning and property services firm China Resources Mixc Lifestyle. Real estate developers China Resources Land and Country Garden Holdings also outperformed.

The rally suggests investors are rotating into reopening plays and assets tied to consumer spending as Hong Kong emerges from strict zero-COVID policies. With the economy reopening, sentiment has improved around retail and property firms that stand to benefit.

Japan Slips Lower on Retreating Energy Stocks

In contrast to the upbeat mood in Hong Kong, Japan’s Nikkei 225 and Topix index both edged 0.05% and 0.94% lower. The lone declines in the region were pinned on falling energy stocks as oil prices backed down from recent highs.

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Light crude traded around $91 per barrel after hitting $93 earlier in the week. Brent crude similarly retreated to $95 from over $96. With oil prices giving back some gains, energy stocks came under pressure.

Shipping firm Mitsui O.S.K. Lines plunged over 5% and was the largest loser on the Nikkei. Power companies Kansai Electric and Chubu Electric tumbled nearly 5% each. Overall, the losses in the energy sector were enough to tip Japan into negative territory.

Australian Market Recovers from Losing Streak

Australia’s benchmark S&P/ASX 200 index shook off its three-day slide, managing a 0.34% gain to finish near 7,049. The advance brings the index back into positive territory for the week after steep declines in the previous sessions.

Strength in the heavily-weighted financials and materials sectors supported the broader index. Outperformance by major banks like CBA and ANZ pushed the financial sector over 1% higher on its own. Big miners BHP and Rio Tinto also outperformed, lifting the materials component.

The lift in Australian shares mirrors improved sentiment across the region on Friday. However, lingering economic uncertainties and recession fears mean markets remain vulnerable to rapid swings.

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Overnight Strength on Wall Street

Gains across Asia followed an upbeat overnight session on Wall Street. The S&P 500 rallied 0.6% to close near 3,797 while the Dow Jones Industrial Average added 0.3%. The tech-heavy Nasdaq Composite led with a 0.8% gain.

The advance came ahead of a key personal consumption expenditure inflation report due Friday, which could impact the Federal Reserve’s rate hike path. Markets are also eyeing negotiations in Washington around government spending before an October 1 budget deadline.

Despite the gains, September is still on pace to be the worst month for the S&P 500 since March 2020, when the COVID-19 pandemic triggered a market meltdown. The Fed’s aggressive rate hikes and recession fears continue to dampen investor sentiment in equities.

Key Data Releases Out of Japan

A duo of critical economic reports out of Japan offered a mixed picture for the country. Headline inflation in Tokyo rose 2.8% in September from a year earlier, slowing from 2.9% in August. The core inflation rate, excluding fresh foods, ticked down to 2.5% from 2.6%.

The softer inflation data provides some hope that global price pressures may be near peaking. However, it remains well above the Bank of Japan’s 2% target and unlikely to spur a change in the central bank’s ultra-dovish monetary policies.

Meanwhile, Japan’s nationwide unemployment rate held steady at 2.5% in August, despite fears of an economic downturn. Separate data showed industrial output was flat in August, better than an expected decline, while retail sales grew more than forecast.

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The data suggests Japan’s economy remains on relatively stable footing for now. But with headwinds mounting globally, the outlook remains clouded. Investors continue to monitor incoming data for signs of deteriorating conditions.

Markets Eye US Inflation Data

Looking ahead, Friday’s PCE inflation figures out of the United States will be closely watched by global markets. The PCE index is the Fed’s preferred gauge of price pressures and could impact rate hike expectations.

Traders are also keeping tabs on fiscal policy talks in Washington. Lawmakers are aiming to pass a temporary funding extension before next week’s deadline and avert a disruptive government shutdown.

With uncertainty swirling, markets are likely to remain choppy in the near term. However, the broader rebound on Friday suggests investors are keen to buy dips when valuations fall far enough. Despite the obstacles, appetite for risk assets remains intact.

Overall, the final Asian trading session of the week brought a pronounced recovery. Gains in Hong Kong’s benchmark index helped offset Japan’s slide, allowing most regional indexes to shake off recent weakness. While challenges persist, investors appear ready to capitalize on any pullbacks, underpinning markets.

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