Friday, November 25, 2011

Asian shares, euro fall on Europe deadlock

TOKYO (Nov 25): Asian shares and the euro both hovered near seven-week lows on Friday as European officials failed to soothe investor fears that the euro zone's debt crisis could trigger a credit crunch if funding costs run out of control.

MSCI's broadest index of Asia Pacific shares outside Japan fell 0.4 percent on Friday, hovering near a seven-week low hit the day before. Japan's Nikkei opened down 0.3 percent on Friday, hitting a fresh two-and-a-half-year low, but was later trading flat.

European shares fell for the sixth consecutive session in low volume on Thursday while Wall Street was shut for the Thanksgiving holiday.

With European policymakers struggling to break out of the deadlock and no convincing progress in sight over the euro zone debt crisis, investors were shunning riskier assets and selling assets normally perceived as safe to raise cash or cover losses.

France and Germany agreed on Thursday to stop bickering openly over whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis, while expressing their backing for Italian Prime Minister Mario Monti in his task of overcoming the country's massive debt burden.

French President Nicolas Sarkozy also said Paris and Berlin would circulate joint proposals before a Dec. 9 European Union summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.

But with market seeking actions rather than rhetoric, sentiment remained highly risk-averse as Germany stood firmly opposed to the creation of joint euro zone bonds or boosting the ECB's role in solving the fiscal problems of individual euro zone members.

"Disappointment that officials continue to tinker with the trivial rather than consider the bold pushed risk appetites lower and increased the downside risks to the outlook for the European sovereign debt crisis," said Besa Deda, chief economist at St. George Bank in Sydney.

Funding stresses for European banks escalated, with the cost of swapping euros into dollars in the currency swap market rising to fresh three-year highs of 148 basis points on Thursday.

The ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.

The euro hovered near a seven-week low against the dollar on Friday, trading at $1.3329, not far from Thursday's low of $1.3316.

Commodity currencies, a gauge of risk-taking, struggled, with the Australian dollar down 0.2 percent to $0.9705 and not far from a seven-week low of $0.9664 set earlier in the week.

A day after weak demand for a German bond auction shocked global markets and fuelled fears the crisis may be hurting Europe's economic powerhouse, the closely-watched German Ifo business climate index on Thursday bucked expectations and showed a rise for November for the first time since June.

German government borrowing costs stayed elevated, with 10-year German government bond yields rising as high as 2.14 percent on Thursday to their highest in nearly a month.

The premium investors demand to hold Portuguese government bonds over German Bunds rose on Thursday after Fitch downgraded Portugal's rating to junk status.

Sentiment was cautious in Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index little changed on Friday.

Japanese government bonds fell, with the benchmark 10-year yield rising 2 basis points to 1 percent. Spot gold fell 0.1 percent to $1,692.20 an ounce, after falling to a one-month low of $1,665.88 earlier this week. - Reuters

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