Asian markets mixed as Kashmir tensions hit rally

Mumbai was down 0.4 percent while Karachi stock sank almost three percent.

HONG KONG (AFP) - Asian markets were mixed Wednesday as an earlier rally had the wind taken out of it after Pakistan said it had shot down two Indian jets in its airspace in Kashmir, fuelling concerns of conflict between the nuclear-armed rivals. Regional investors had been in a broadly upbeat mood owing to optimism about a China-US trade deal, a dovish outlook on monetary policy from Federal Reserve boss Jerome Powell and easing Brexit worries.

But trading floors were shaken in the afternoon by a statement from the Pakistan Air Force that it had downed the two planes and arrested one of the pilots.

The developments came a day after warplanes struck a site in Pakistan in retaliation for a February 14 suicide bombing in the Kashmir that that killed 40 Indian troops.

Islamabad had vowed to retaliate -- fuelling fears of a dangerous confrontation.

Markets fell sharply on the reports but managed to claw back some of the losses.

Mumbai was down 0.4 percent while the rupee was down a similar amount. The Karachi Stock Exchange sank almost three percent.

Shanghai ended up 0.4 percent, having plunged deep into negative territory, though Hong Kong was struggling to get back into the green.

Tokyo, which closed before news of the jet downings filtered through, was up 0.5 percent, though Singapore was 0.1 percent lower and Manila shed more than one percent.

Sydney added 0.4 percent, Taipei was flat and Wellington was off 0.5 percent.

‘Perilous game’ 

Hopes that Britain will not leave the European Union without a divorce pact in place had provided some support to markets and the pound in particular.

Sterling held its own in Asia a day after surging more than one percent on Prime Minister Theresa May’s decision to let MPs vote on a three-month delay to the March 29 Brexit deadline if she is unable to ram through her own deal.

But Jeffrey Halley, senior market analyst at OANDA, pointed out that risks remained.

Investors are "clearly second-guessing both the UK Parliament and the European Union, moving to a Brexit delay followed by a Brexit deal scenario", he said.

"This seems like a perilous game to play, but the momentum of this hope-versus-reality trade could push the pound to much higher levels yet. Be warned, though, that a disappointment in this glossy scenario could see just as ugly a move back down."

Traders will be keeping an eye on the second day of congressional testimony by Fed chief Powell after saying Tuesday that he saw inflation falling short of the bank’s two percent target despite rising employment and economic growth.

The comments follow recent Fed announcements that it will be "patient" before lifting or cutting interest rates and did not provide much news to investors.