Markets mostly rose Wednesday on hopes that China will further ease its strict Covid containment measures following widespread political unrest, though gains were tempered by leaders' warnings of a crackdown on dissent across the country.
Traders were also nervously awaiting a key policy speech by Federal Reserve chief Jerome Powell later in the day that could outline the bank's strategy for tackling inflation in light of a recent slowdown in price gains.
A spectacular rally in Hong Kong on Tuesday led gains across Asia as investors looked past weekend demonstrations in China after officials announced moves aimed at softening their zero-Covid strategy.
Leaders said they would step up their drive to vaccinate the elderly, while the National Health Commission appeared to blame local governments for instituting extreme measures such as tight lockdowns, one of the main reasons for the unrest.
However, in a sign that the leadership was determined to maintain its authority, the country's top security body called for a "crackdown" against "hostile forces".
The warning came after security services were sent out in force to prevent further demonstrations, the likes of which had not been seen in decades.
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The developments saw Hong Kong stocks swing between gains and losses in the morning, having soared more than five percent Tuesday, while Shanghai fluctuated.
Data showing China's factory activity shrank further in November highlighted Covid-zero's impact on the country's economy.
"Due to a more reflective approach to the recent zero-Covid measures, Chinese stocks have taken substantial leaps and bounds this week," said SPI Asset Management's Stephen Innes.
"Still, the global investment community is keeping close tabs on China... Any antagonistic escalation risks a walk back of current positive momentum, especially with folks playing the trade-off thinking that a calming in protests might hasten a shift away from zero-Covid policies."
There were also gains in most other Asian markets, with Sydney, Seoul, Wellington, Taipei and Jakarta in the green, though Tokyo dipped.
Focus is also on Fed boss Powell's speech later Wednesday on the labour market, with many expecting him to outline the bank's plans for future interest rate hikes.
After lifting borrowing costs 75 basis points for the past four meetings, officials are widely seen as taking their foot off the gas when they gather next month following a recent batch of weak data including a below-forecast inflation print for October
But a string of policymakers has lined up in recent weeks to ram home their
intention to keep lifting until they are satisfied inflation has been slayed, with warnings there will not likely be any cuts until 2024.
The sharp lift in rates this year has fanned bets that the world's top economy will tip into recession.
"The Fed has hiked enough -- and quickly enough -- to make recession a base-case scenario in our book," Lauren Goodwin, at New York Life Investments, said.
"Volatility and risk premia are likely to remain elevated as long as the Fed is fighting inflation in a growth slowdown."
The remarks by Powell come just before the Friday release of US jobs data for November, which will provide the latest snapshot of the economy.
Key figures around 0230 GMT
Tokyo - Nikkei 225: DOWN 0.6 percent at 27,858.16 (break)
Hong Kong - Hang Seng Index: UP 0.3 percent at 18,251.79
Shanghai - Composite: UP 0.1 percent at 3,153.65
Euro/dollar: UP at $1.0346 from $1.0332 on Tuesday
Dollar/yen: UP at 138.69 yen from 138.67 yen
Pound/dollar: UP at $1.1977 from $1.1952
Euro/pound: DOWN at 86.38 pence from 86.42 pence
West Texas Intermediate: UP 0.8 percent at $78.81 per barrel
Brent North Sea crude: UP 1.0 percent at $83.88 per barrel
New York - Dow: FLAT at 33,852.53 (close)
London - FTSE 100: UP 0.5 percent at 7,512.00 (close)