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Global shares, euro fall on renewed euro zone debt concerns

April 16, 2012

TOKYO: Asian shares and the euro fell today as a surge in Spanish government bond yields renewed concerns about the euro zone’s sovereign debt crisis and undermined investor appetite for riskier assets.

A firmer dollar on the back of European deficit woes, and worries about slowing demand from China, also weighed on a broad range of commodities from precious metals and copper to oil.

MSCI’s broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 0.8%, dragged lower by the materials sector .MIAPJMT00PUS, which underperformed other sub-indexes with the broad drop in commodities prices.

Japan’s Nikkei average .N225 dropped as much as 1.6%.

Spain’s government bond yields jumped on Friday and the cost of insuring its debt against default hit an all-time peak as record borrowing by its banks from the European Central Bank highlighted fears about the country’s finances.

The banking sector led European and US shares down on Friday, with US indexes posting their biggest two-week percentage drops since late November.

Spain faces a test of investor confidence this week with an auction of two- and 10-year bonds on Thursday.

“Market focus is firmly back on the EUR,” Barclays Capital analysts said in a research note. “Concerns about Spain have lingered and the market may be responding to any perceived lack of support for the periphery.”

The euro slipped 0.5% to $1.3015, after hitting a one-month low of $1.3009 today. The dollar index .DXY, measured against major currencies, rose 0.3%.

The dollar’s strength pushed precious metals lower, with spot gold down 0.5% to $1,650 an ounce, extending Friday’s 1% loss, while spot platinum slid more than 2% to $1,559 an ounce, its lowest since Jan 25.

Industrial commodities also took a beating, with Brent crude oil shedding more than a dollar to a low of $120.06 a barrel, and Shanghai copper falling more than 2% to a three-month low of 56,700 yuan per tonne.

China worry overdone?

Investor sentiment has also been hurt by worries about slackening demand from China, the world’s second largest economy, after data showing a slowdown in private domestic demand, retail sales and fixed asset investment and a sharp drop in property and home sales, which weigh on construction demand.

But most analysts say the data remains consistent with a “soft landing” scenario for the Chinese economy.

“Worries among international investors appear unjustified, as it would be easy for the government to re-accelerate growth if it chose to do so,” said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan, at Credit Agricole CIB.

“At the same time, policymakers should not delay action given mounting signs of demand weakening and downside risks, especially from housing and exports,” he said.

A move by China on Saturday to double the size of the yuan’s trading band against the dollar was also seen by investors as a strong signal that Beijing is comfortable with economic growth and believes it has avoided a hard landing.

Technicals driving sentiment

Some analysts say recent market trends are largely driven by hedge funds, with their similarly programmed trading exacerbating one-way price moves.

“Prices have recently been moving sharply while volumes are not picking up necessarily,” noted Koichiro Kamei, managing director at financial research firm Market Strategy Institute in Tokyo. “That reflects a programming typical for funds aiming to hit specific market levels in thin volume to create a near-term trend and maximise profits in a range-bound market,” he said.

“Metals for industrial use will face tough times ahead given weak demand outlook as is for oil, but gold will eventually find support from the ongoing euro zone uncertainties,” Kamei added.

Italian Prime Minister Mario Monti’s government will seek to pass new measures this week to foster growth and press its reform agenda.

Investors will also keep an eye on a weekend meeting of the International Monetary Fund, where a plan to raise new resources for the IMF to contain the euro zone debt crisis is tops the agenda.

Reflecting investor nervousness, fund groups specializing in riskier asset classes struggled during the second week of April, EPFR Global said. EPFR Global-tracked High Yield Bond Funds saw an 18-week inflow streak come to an end with an outflow of $1.4 billion.

Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 5 basis points.

– Reuters


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