By Daniel Leussink

TOKYO (Reuters) – Asian shares rallied on Wednesday as fears of a Russian invasion of the Ukraine this week dissipated after Moscow indicated it was returning some troops to base in an apparent de-escalation, delivering investors a measure of relief.

The tension between world powers over the Ukraine situation, which has developed into one of the deepest crises in East-West relations for decades, has been front-and-centre of investors’ minds.

MSCI’s broadest index of Asia-Pacific shares outside Japan surged 1.1%, playing catch-up with a rally in U.S. and European stocks on Tuesday.

Japan’s Nikkei soared 2.2% to rebound from two days of falls, while Australia’s S&P/ASX200 gained 1.1%.

Elsewhere in the region, Hong Kong’s Hang Seng Index jumped 1.3% and China’s CSI300 Index was up 0.7%.

But while the immediate risk of a flare-up in tensions over Ukraine waned, some market watchers warned that save-haven assets could find a renewed bid in the case of new escalations over the conflict.

“There seems to be a growing belief that (Russian President Vladimir) Putin is leaning on a diplomatic solution and the market has walked back some positioning placed for an all-out escalation,” said Chris Weston, head of research at foreign exchange brokerage Pepperstone in Melbourne.

“News flow can still shift rapidly, and I suspect there’ll be more twists and turns that suggest geopolitical hedges – long crude, gold, volatility, and short risk – can make a comeback,” he wrote in a note.

S&P 500 and Nasdaq futures were both down 0.2%, taking a breather after rallying on Tuesday.

On Tuesday, U.S. President Joe Biden warned that more than 150,000 Russian troops remained near Ukraine’s border, while Kyiv said the online networks of its defence ministry and two banks were hit by what is called a distributed denial-of-service.

Investors’ attention was also turning to economic and monetary policy developments amid ongoing speculation the U.S. Federal Reserve might raise rates by a full 50 basis points in March.

The tension surrounding the Ukraine situation has “distracted from the fact there are still major risks and concerns about global monetary policy,” said Kyle Rodda, a market analyst at IG in Melbourne.

“That could resurface as a driver for volatility as geopolitical tensions ease a little bit.”

Among events in focus was the release of the minutes from the Fed’s January policy meeting later on Wednesday as well as January consumer inflation data from the United Kingdom and Canada.

China’s factory-gate and consumer price inflation both came in lower than expected in January, data on Wednesday showed, which some analysts believe could provide room for the country’s central bank to ease policy to support the economy.

The yield on benchmark 10-year Treasury notes was last at 2.0294%. The two-year yield, which goes up with traders’ expectations of higher Fed fund rates, was at 1.5578%.

Currency markets were pretty quiet, with the dollar index holding steady at 96.029 after pulling back from a two-week high on Tuesday after the Ukraine geopolitical risk premium came out of the market. [FRX/]

“Expectations of an aggressive Federal Reserve hike cycle should keep a base for the DXY in place,” analysts at Westpac said in a note.

The yen traded at 115.66 per dollar.

U.S. crude was flat at $92.07 a barrel after pulling back from a seven-year high hit on Monday. Brent crude was down 0.1% at $93.19 per barrel.

Gold held steady. Spot gold was traded at $1,852.91 per ounce. [GOL/]

(Reporting by Daniel Leussink; Editing by Stephen Coates and Sam Holmes)