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 Asian stocks rebounded from a two-month low on Wednesday as data showing China's manufacturing activity in February expanded at the fastest pace in more than a decade cheered investors, ofsetting fears over rising interest rates.

China's official manufacturing purchasing managers' index (PMI) stood at 52.6 last month against 50.1 in January, based on data from the National Bureau of Statistics, smashing expectations as production zoomed after the lifting of COVID-19 restrictions late last year.

China's non-manufacturing activity similarly grew at a faster pace in February, while data from the Caixin/S&P Global manufacturing PMI also pointed to a rise in factory activity in February for the first time in seven months.

That sent MSCI's broadest index of Asia-Pacific shares outside Japan surging more than 1% to 516.84, after having bottomed at 509.40 - its lowest since early January - earlier in the session.

Chinese stocks also received a boost, with China's blue-chip CSI 300 Index jumping more than 1%, while the Shanghai Composite Index was last about 0.6% higher.

Hong Kong's Hang Seng Index climbed 2.67%, while the Hang Seng Tech Index was up 4%. The Hang Seng Mainland Properties Index surged 3.5%.

"The China February PMI data this time has assumed even greater importance due to the usual lack of January/February hard data until later this month," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"The China February official PMIs and Caixin manufacturing PMI all surprised strongly to the upside, and notably higher than the previous January figures."

Japan's Nikkei steadied at 27,446.91.

In currency markets, the dollar unwound earlier gains as some risk-on sentiment took charge, with the euro and sterling rising 0.06% and 0.04%, respectively. [FRX/]

The Aussie, often used as a liquid proxy for the yuan, edged 0.1% higher to $0.6735, bouncing from a two-month low of $0.6695 earlier in the session.

Softer-than-expected growth and inflation data in Australia sent the Aussie sliding in early Asia trade.

The local stockmarket, however, came off recent lows. It was last 0.16% higher.

The Chinese onshore yuan rose marginally to 6.9302 per dollar, while its offshore counterpart gained a larger 0.2% to 6.9400 per dollar.

RATES RISK

The U.S. dollar has been on a tear in recent weeks and gained on most majors through February, as investors ramped up their expectations that the Federal Reserve would need to take interest rates higher to tame still-sticky inflation.

Stocks had handed back January gains in February, while bonds slid on renewed worries about rising rates.

As the final month of the first 2023 quarter starts, traders are looking to the next flush of economic indicators to gauge the outlook. U.S. ISM PMI figures are due later in the day.

"The upcoming data cycle and anticipated forecast revisions by central banks, which will be presented over the next 2-3 weeks, will be crucial in forming the next leg of financial market trading," ANZ Bank analysts said in a note.

The mixed tone of data in the last few days seems to have lots of assets pausing at major chart levels.

Hotter-than-expected inflation readings in Europe overnight drove bond selling, before weaker-than-expected U.S. confidence figures offered perhaps a glimmer of hope that rate hikes are biting and are perhaps within striking distance of peaking.

Two-year Treasury yields, a guide to short-term U.S. rate expectations, are close to four-month highs, but at 4.8345%, are below a November peak of 4.8830%. Benchmark 10-year yields stood at 3.9415% in Asia.

Commodities edged slightly higher as China demand hopes and signs of a steady recovery balance global growth concerns, with Brent crude last 0.5% higher at $83.86 a barrel.

Gains in grains were capped as rains in parts of the U.S. winter wheat belt and optimism over a Russia-Ukraine export deal drove investors to close out long positions. [GRA/]

Geopolitics is also keeping investors on edge. U.S. President Joe Biden's visit to Kyiv and Russian President Vladimir Putin's abandonment of the last remaining nuclear arms control treaty with the U.S. signaled a hardening of positions.

China, which signalled support for Russia by sending its top diplomat to Moscow last week, has issued a call for peace, though it has been met with scepticism and Washington has said in recent days it worries that China could send arms to Russia.

"Should Beijing send Russia arms, it risks a rapid geopolitical breaking of the world economy," said Rabobank's research head, Jan Lambregts. "Markets have not even begun to contemplate what this might mean."