Thursday, October 27, 2011

Asia shares, euro rally on EU summit

TOKYO: Riskier assets across the board from equities to oil and the euro rallied on Thursday, Oct 27 after European leaders agreed to boost the region's rescue fund and struck a deal on a 50 percent writedown for private bondholders on their Greek debt.

Spreads tightened in Asian credit markets while U.S. Treasuries extended losses in Asia, but gold extended gains to their highest in more than a month on confirmation that progress in resolving European sovereign debt crisis will remain slow.

Lack of details on how to deliver the broad rescue scheme meant there was still a long way before markets get any convincing answers to relieve their concerns over the contagion of the Greek debt crisis to other euro zone countries and the damage to the broader economy.

MSCI's broadest index of Asia Pacific shares outside Japan was up nearly 2 percent to its highest level since Sept. 12, rising more than 18 percent from its lows hit on Oct. 4.

The Nikkei rose 0.5 percent, as the yen's rise to a record high against the dollar of around 75.70 yen on Wednesday fuelled worries about the impact to corporate earnings.

"The blueprint is out, but it's coming in dribs and drabs and not as clear as we thought it will be," said Jonathan Barratt, managing director at Commodity Broking Services, adding that it also did not fully address the issues.

"But it's still a step forward and each step keeps optimism intact. But the task ahead is too large to put a deadline on, and if there is a lag, the market will lose its optimism. If there are no concrete measures, it will draw down market prices."

French President Nicolas Sarkozy said on Thursday after a summit of euro zone heads of state and government that the region's rescue fund will be leveraged four or five times, giving it firepower equivalent to about 1 trillion euros ($1.4 trillion).

He said the leaders had agreed with bankers that private sector investors would accept the loss of half the value of their Greek bond holdings, and to refinance Greece's remaining debt at preferential rates.

Two approaches to strenthen the bailout-fund, the European Financial Stability Facility, were identified: one aiming at getting credit enhancement to sovereign bonds issued by member states and another aiming to set up one or several special purpose vehicles to finance its operations.

European policymakers also agreed to force banks to raise their capital buffers to 9 percent in core Tier 1 capital, a measure of banks' financial health, by June next year, to protect against losses from any Greek debt restructuring and to contain the region's financial crisis.

In another sign of progress to ease concerns about Greece's debt issues from spreading, euro zone leaders will welcome Italy's plans to increase the pension age to 67 but will want detailed plans on how it can be achieved.

The euro surged to its highest in seven weeks to just below $1.40 .

NEXT FOCUS - FUNDAMENTALS

With the summit meeting providing some direction for key issues, the market will shift its focus to details for implementing these measures while more closely watching the impact of the euro zone debt crisis on the economy.

"The markets will remain in a cycle of expectations and disappointments over the euro zone debt issues for some more time to come, as Europe's sovereign debt issue will take a long time to resolve and there are many more hurdles that need to be cleared," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.

The markets had priced in an extremely pessimistic scenario, so the outcome prompted covering of these positions.

"The markets are now shifting their focus to how the debt crisis has affected the economy," Uchida said. "Whether the market can consolidate in a range or enter a downtrend will depend on how they see risks from fundamentals."

Commodities rose, with oil gaining more than $1 while gold extended its gains to its highest in over a month on Thursday, after rising 1.5 percent the previous session when it notched its longest stretch of gains in over two months.

Gold has been underpinned by safe-haven allure amid uncertainty over the euro zone crisis as well as strong physical demand when prices fall.

BET ON RISK RALLY

Technicals suggest the markets were providing good trading opportunities for both bulls and bears, encouraging investors to buy on dips when a risk rally eases.

The euro, having consolidated in a range of $1.3650-$1.3950 since mid-October, was technically set to break out the range.

In Asian credit markets, weakening strains helped sharply narrow the spreads on the iTraxx Asia ex-Japan investment grade index , a gauge for whether investor risk appetite is returning, by 12 basis points on Thursday.

"We could see this rally go further based on the technicals, as real money accounts are underweight and dealers are lightly positioned, but longer term it could be capped by issuance," said a Singapore-based credit trader with an Asian bank referring to the supply pressure built up after inactivity in the primary markets in over a month.

Investors' appetite eased for protection in the options market against losses, with the CBOE Volatility index VIX -- a 30-day risk forecast of volatility in the S&P 500 -- falling 29.86 on Wednesday from 32.22 the day before.

Since Oct. 4, when the Standard & Poor's 500 Index slumped to intraday levels last seen in September 2010, the benchmark index has surged nearly 15 percent, mostly on hopes for a solution to the debt crisis.

While it has failed to clear a key technical level of a 61.8 percent retracement of the 2011 decline around 1,258, the index has found a solid support around 1,221, suggesting a level investors could buy on dips.

With the rally in riskier assets, safe-haven U.S. Treasuries fell further in Asia, with yields on the benchmark 10-year notes inching up to 2.22 percent from 2.21 percent late in New York on Wednesday. - Reuters

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