Wednesday, 27 June 2012

Asian shares, euro edge up but EU summit worries cap gains

Posted: Thu, Jun 28 2012. 10:48 AM IST  Chikako Mogi / Reuters

MSCI Asia ex-Japan up 0.3%, Nikkei rises 1.4%; euro up tepidly on speculation ECB to act next week; nervous markets may falter ahead of divided EU summit

Tokyo: Asian shares rose on Thursday on encouraging US economic data, but prices were capped with investors tense ahead of a European Union summit of leaders deeply divided on how to tackle the long euro zone debt crisis and stop it from spreading.

European shares were likely to extend Wednesday’s gains modestly, with spreadbetters predicting that region’s major markets would open as much as 0.3% higher. US stock futures were up 0.1%.

On Wednesday, European shares rebounded and Wall Street stocks logged their largest gain in a week after data showed stronger-than-expected demand for long-lasting US manufactured goods in May, a rising gauge of planned business spending and increased pending home sales in May.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose as much as 0.7% before paring gains to trade up around 0.3% while Japan’s Nikkei average advanced 1.4%.

“It’s completely a reflection of the fact the European markets rebounded a bit yesterday,” said Guy Stear, head of research with Societe Generale in Hong Kong.

“People don’t want to go short into the meeting, that’s why we have a bit of a short-covering bounce. There’s always a potential in Europe for a surprise,” even if there were few signs for any agreement to be reached at the meeting, he said.

The bright sentiment may evaporate later on Thursday, however, when the two-day EU summit starts in Brussels, with Germany, France and Italy openly divided over putting the priority on the bloc’s long-term fundamental problems ahead of calls for emergency action.

German chancellor Angela Merkel offered no immediate moves to ease the tension, while EU Economic and Monetary Affairs Commissioner Olli Rehn said Europe would work at the summit on short-term steps to relieve market pressure on countries at risk.

EU leaders have met 20 times to try to resolve a crisis that has spread across Europe since beginning in Greece in late 2009.

Euro floats aimlessly

The euro rose 0.4% to $1.2514, still not far from its lowest in more than two weeks at $1.2441 hit on Tuesday, underpinned partly by speculation the European Central Bank would take action next week to ease European banking and debt market strains.

“European policymakers have a good track record for underwhelming with their response to the banking and sovereign crisis to date,” ANZ Bank said in a research note.

“Spanish and Italian bond yields will remain vulnerable to whatever is delivered. Even if there is a good outcome, the uncertainty surrounding the ability to implement will be high. The Europeans need a strategy to cap bond yields or else another sovereign will be in need of a rescue package,” it said.

If the EU summit disappoints, focus may turn to the ECB to deliver action, such as an interest rate cut.

“The market is already expecting disappointment from the summit. But I think the euro will be supported by expectations that the European Central Bank will take some measures next week,” said a currency trader at a Japanese bank.

Italy’s six-month borrowing costs rose to 2.957% at auction on Wednesday, their highest since December. Rome faces a more challenging test of investor appetite when it offers five-year and 10-year debt for up to €5.5 billion on Thursday.

Europe’s debt turmoil pushed Japanese fund managers’ weightings in domestic stocks and bonds to record highs in June.

Commodities can wait

US crude futures extended gains from Wednesday, rising 0.4% to $80.55 a barrel, but Brent futures pared earlier gains to stand nearly flat at $93.48.

London copper was up 0.2% at $7,420 a tonne on the upbeat US data, which supported demand for industrial metals sensitive to the economic outlook.

Naohiro Niimura, a partner at Tokyo-based research and consulting firm Market Risk Advisory Co, said investors should not necessarily rush to buy commodities yet because prices could test lower still depending on the EU summit’s outcome.

“Policymakers won’t opt for the worst case scenario if they are rational, but over the past year, politicians in each country showed they don’t or can’t make economically viable decisions,” Niimura said.

“So, if there is no urgent need to tap raw materials or commodities products, then one should wait at least until the ECB’s meeting,” he said, adding that investors can use put or call options to hedge against price swings.

Asian credit markets firmed slightly, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 3 basis points.