Friday, November 18, 2011

Asian shares fall on fears over Europe fund tightness

TOKYO (Nov 18): Asian shares fell for a fourth day in a row on Friday as Europe's funding difficulties intensified, with Spanish borrowing costs hitting an unsustainable level and premiums for dollar funds rising further.

In a sign that global funding strains may spread to Asia, benchmark three-month euroyen interest rates futures fell to an eight-month low on Friday on concerns that tightness in dollar money markets may prompt non-Japanese banks to raise yen at a higher rate.

Worries over the European debt crisis prompted investors to shed riskier commodities, extending their slide from Thursday when prices took their steepest tumble since September.

MSCI's broadest index of Asia Pacific shares outside Japan fell 1.7 percent with the materials sector leading the decline, as a slide in commodities prices hit the stock market in resource-dependant Australia.

The index, which fell the past two weeks, was set for its biggest weekly loss in about two months. It was down about 3.6 percent for the week and about 16 percent this year.

Japan's Nikkei stock average fell 1.3 percent and also headed for a third weekly loss. It is down about 18 percent so far in 2011.

"The euro zone debt crisis is turning into a global liquidity crisis, and leading to a vicious cycle of intensifying funding tightness spurring dumping of risk assets," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.

New Italian Prime Minister Mario Monti on Thursday pledged his country would embark on radical fiscal reforms to pull itself out of the debt crisis. But investor jitters remained firmly in place as euro zone governments struggle to raise funds and banks refrain from lending, seizing up market liquidity.

Euro/dollar three-month cross-currency basis swaps , the cost of swapping euros for dollars, widened by around 6 basis points to -136 basis points on Thursday, the most since the 2008 financial crisis.

"Focus right now is on short-term dollar funding, but longer-term funding from six months out to a year is also getting tighter. Major central banks must take a coordinated action to ensure all these funding needs are met," Uchida said.


U.S. stocks fell on Thursday, as fears over euro zone debt woes overtook more encouraging signs for the U.S. economy after data showed a drop in new claims for jobless benefits to a seven-month low last week and a rebound in permits for future home CONSTRUCTION [] in October.

"Despite positive economic data from the U.S., the market is still focused on Europe and its contagion risk," said Hiroichi Nishi, equity general manager at SMBC Nikko Securities.

The U.S. dollar steadied on Friday, hovering near a six-week high of 78.467 hit the day before, while the euro stayed above five-week lows of $1.3421 touched on Thursday, with European banks seen repatriating funds as signs of funding stress grew.

But commodities currencies fell, with the Australian dollar piercing through parity.

Oil prices fell 0.1 percent and copper eased 1.2 percent on Friday while silver slipped more than 2 percent to a one-month low on Friday, following to a 7-percent slump the day before.

Risk aversion dampened sentiment in Asian credit markets, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by 5 basis points on Friday.

"We are seeing risk aversion that is spreading aross asset classes, with concerns about euro zone fiscal debt crisis, weak aution results in Europe, and worries ahead of this week's Spanish election all leading to deteriorating in sentiment," said Dariusz Kowalczyk, senior economist and strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Investor commitment to a crucial bailout fund, the European Financial Stability Facility (EFSF), is conditional on improved market sentiment which can only be obtained through troubled countries such as Italy and Greece demonstrating progress in their fiscal reforms.

Euro zone policymakers are aiming to boost the firepower of the EFSF and are working to finalise the legal and technical details on Nov. 29 and to have the leveraged EFSF ready for operation before Christmas.

The yield premium of Spanish 10-year government bonds over German Bunds hit its highest level since the launch of the euro above 500 basis points after Spain paid an average yield of 6.975 percent on Thursday to sell its bonds, the highest rate since 1997 and just shy of the 7 percent level seen as unsustainable.

Spain faces a parliamentary election on Sunday, putting the country under pressure to quickly reassure markets. ' Reuters


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