Nikkei erases some gains after data shows manufacturing activity shrank in August

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Rest of Asia trade mixed

South Korea’s Kospi index fell 0.47% as major chipmakers Samsung and SK Hynix declined 1.24% and 1.72%, respectively.

Hong Kong’s Hang Seng index declined 0.66% while Australia’s ASX 200 added 0.36%.

Mainland Chinese markets traded mostly higher: The Shenzhen component index added 0.26%, the Shenzhen composite gained 0.23% but the Shanghai composite was near flat at 2,879.22.

Meanwhile, Singapore’s Straits Times Index added 0.18%. The Jakarta Composite fell 0.18% ahead of Bank Indonesia’s monetary policy decision due later on Thursday.

“The hot and cold vibes in the equity markets continue with gains in the overnight session effectively reversing the losses recorded the previous day,” Rodrigo Catril, senior foreign exchange strategist at the National Australia Bank, said in an early morning note before markets opened.

Oil prices up

Oil prices gained Thursday during Asian trading hours. U.S. crude traded up 0.23% to $55.81 a barrel. International benchmark Brent erased some of its earlier gains to trade up 0.07% at $60.34.

U.S. crude inventories fell by 2.7 million barrels last week, which was more than expected, Reuters reported.

Energy names in Australia rose: Santos shares were up 3.35%, Oil Search gained 0.46% and Woodside Petroleum added 0.61%. But Japan’s Inpex fell 1.21% while Japan Petroleum added 1.42%.

Asia-Pacific Market Indexes Chart

Modest reaction to Fed minutes

Markets had a relatively modest reaction overnight after the Fed released minutes of its last meeting in July, where the U.S. central bank lowered the benchmark rate by 25 basis points.

In its minutes, Fed officials who voted to lower interest rates three weeks ago agreed that the move shouldn’t be viewed as an indication that there is a “pre-set course” for future cuts.

The summary indicated that policymakers viewed the move as a “mid-cycle adjustment” — an expression that Fed Chair Jerome Powell had used in a news conference afterward. That was said to have contributed to a stock market sell-off following the July 30-31 meeting as market players grew concerned that the Fed might not be as accommodative with policy as anticipated.

Underpinning the meeting minutes was worry among Fed members over future growth prospects as the U.S.-China trade war drags on. The fight between Beijing and Washington has roiled markets for more than a year, and there have been signs the rafts of additional tariffs from both sides are having real effects on economies around the world.

Randy Kroszner, deputy dean for executive programs at the University of Chicago Booth School of Business, said as far as possible resolution is concerned, there are two aspects to look at.

“There are things like soybeans and cars, and that’s something you can monitor, you can count, and, so, I could see some closure coming on that,” Kroszner told CNBC’s “Squawk Box.” “But the much bigger picture issues about the system — the approach taken to intellectual property, the defense of that, the requirement for technology transfer — that I don’t see a resolution coming anytime soon.”

Currencies and recession fears

The U.S. dollar last traded at 98.254 against a basket of its peers, slipping from an earlier high of 98.301.

Among currency pairs, the Japanese yen traded at 106.46 against the dollar, stronger than a previous level around 106.64 while the Australian dollar changed hands at $0.6775.

“The main reason why the (dollar) strengthened and US treasury yields lifted was because the minutes did not strengthen the chances of further rate cuts this year. The Fed instead eased back slightly the probability of further cuts,” Richard Grace, chief currency strategist and head of international economics at the Commonwealth Bank of Australia, wrote in a morning note. Bond yields move inversely to prices.

Still, fears of recession lingered in the market as the spread between the yield on the 10-year U.S. Treasury note and that of the 2-year note turned negative for the second time in one week. The inverted bond-market spread is seen by many veteran traders as an important recession omen, though the timing on the eventual downturn is less predictable.

— CNBC’s Jeff Cox and Thomas Franck contributed to this report.

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