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GLOBAL MARKETS-Shares fall as worries about Spain intensify

by on July 25, 2012 3:30 am BST
 

Tue Jul 24, 2012 11:30pm EDT

* MSCI Asia ex-Japan hits one-month low, Nikkei slips to
7-week low

* Euro near 2-year low versus dollar

* Asian credit a tad weaker

* Investors seek higher returns in credit markets

By Chikako Mogi

TOKYO, July 25 (Reuters) – Asian shares fell and the euro
wobbled above multi-year lows against major currencies on
Wednesday as soaring borrowing costs deepened worries that Spain
might need a bailout, while Greece appeared unlikely to meet
terms conditional to its aid package.

MSCI’s broadest index of Asia-Pacific shares outside Japan
slid 1.1 percent to a one-month low before
paring some losses to stand down 0.6 percent.

Worries about the euro zone crisis hurting corporate
earnings worldwide sent Korean shares down to their 2012
lows while resource-reliant Australian shares fell on
prospects of weakening demand for commodities.

Japan’s Nikkei fell 1.4 percent to a seven-week low
before trimming loses to 1 percent, while U.S. stock futures
pointed to further weakness on Wall Street later in the
day after three consecutive losing sessions for the S&P 500
index .

Grains extended their losses on Wednesday, as traders took
profits from last week’s record highs on improved weather
forecasts, which gave some relief to U.S. crops’ outlook.

Copper hit a one-month low and U.S. crude
eased 0.2 percent to $88.36 a barrel. Brent steadied
at$103.46.

“Generally speaking the outlook for commodities is linked to
the outlook for Europe, and the outlook for Europe hasn’t got
much better for quite some months,” said Richard Murrow, the
director of E.L. & C. Stockbroking.

Risks of Spain requiring huge financial assistance for its
indebted regions, as well as banks saddled with bad loans,
fanned concerns of a contagion to other fiscally challenged
countries, sending Italy’s benchmark stock market down to its
lowest level since the euro’s launch on Tuesday.

The euro was at $1.2068, near a 25-month low of
$1.2042 hit on Tuesday, and at 94.28 yen, just a tad
above 94.12 yen touched on Tuesday, its lowest since November
2000.

The euro remained pressured due to reinforced uncertainty
over Greece, as it held meetings with global lenders to assess
the terms of financial assistance needed to keep it afloat and
retain its euro zone membership.

Twice bailed-out Greece would be found to need further debt
restructuring, three EU officials said on Tuesday, while an ally
of German Chancellor Angela Merkel’s party said he thought a
second round of debt forgiveness was a potential option should
Athens be unable to fulfil terms of its bailout package.

As concerns over a fully-fledged Spanish bailout mount,
finance ministers from France and Spain were set to meet in
Paris on Wednesday after Madrid said Italy and France backed its
call for the EU policymakers to swiftly implement rescue steps.

APPEAL IN RISKIER CREDITS

Bids for safety drove 10-year Treasury yields to
a record low 1.3824 percent in Asia early on Wednesday and
two-year Japanese government bond yield to a
seven-year low. Risk aversion pinned the 10-year Spanish
government bond yield < near its euro-era high of 7.6 percent.

Spain paid the second highest yield on short-term debt since
the birth of the euro at an auction of three- and six-month
bills on Tuesday, indicating difficulties in future debt sales.

Spain’s five-year bond yield rose above 10-year yields and
short-term yields rose above longer-term yields, stoking fears
of an approaching credit event. Similar moves eventually saw an
inversion of yield curves in Greece and Portugal before they
sought international help for their debt crisis.

“With so much risk to go around, markets have been making
sharper and sharper distinctions between ‘safe haven’ and
‘risky’ assets,” said Michael Gavin, head of global macro and
emerging market strategy at Barclays Capital in a report.

Kenneth Akintewe, Singapore-based portfolio manager at
Aberdeen Asset Management, who helps manage Asian fixed income,
also said investors were looking for higher yield and riskier
fixed income assets classes to reduce their risks.

“If they are allocating to Asia, the risk of default in this
region, given the quality of fiscal management, is considerably
less than a number of bond markets in the developed world,” he
said.

“On a risk return basis, it seems like an obvious choice to
reallocate capital to not just Asia but broader emerging
markets,” he said, but added that such an option was also not
risk-free given a slight lack of liquidity in the market as well
as currency risks.

Asian credit markets were sluggish, widening the spread on
the iTraxx Asia ex-Japan investment-grade index by
5 basis points. The spread has been resilient against deeper
losses in other riskier assets over the past month, staying in a
160-173 bps range and below the widest of the year 210 bps.

Japan’s exports fell in June from a year earlier, the first
decline in four months, as a slowdown in Europe, China and other
emerging markets weighed on demand for Japanese goods.

Chinese Ministry of Industry and Information Technology said
on Wednesday the country’s economy will likely pick up in the
second half of 2012 due to government stimulus policies, but
warned Beijing should not underestimate the impact on the
corporate sector from slowing demand as severe challenges
remained both at home and abroad.