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Markets cautious on EU debt crisis response

Text by News Wires

Latest update : 2011-09-28

Stocks in Asia crept up Wednesday in cautious trading, with widespread uncertainty surrounding the EU’s debt plan prevailing. This comes on the heels of Greek Prime Minister George Papandreou’s visit to Berlin on Tuesday.

REUTERS - Asian stocks edged higher and a rally in the euro stalled on Wednesday, as investors looked for more signs that European leaders were tackling a debt crisis that threatens the financial system before committing bolder market bets.

Oil and metals fell and the dollar rose as a rebound in riskier assets ran out of steam and money managers sought safety in the U.S. currency amid signs that a deal on beefing up the euro zone’s rescue fund still faced major hurdles.

“Investors think, isn’t the European situation better? But we have no way of knowing for sure at this point, and until they’re more confident, we probably won’t see major buying,” said Hiroichi Nishi, equity division manager at SMBC Nikko Securities Inc in Tokyo.

Plans to increase the financial firepower of the euro zone’s 440 billion euro rescue fund face opposition in Germany, while a Financial Times report said that a split had opened up within the currency bloc over the terms of Greece’s next bailout.

Japan’s Nikkei rose 0.2 percent, while MSCI’s broadest index of Asia Pacific shares outside Japan gained 0.1 percent. The tech sector was the best performer in the MSCI index, with the defensive telecoms and utilities sectors performing worst.

U.S. stocks rose a little more than 1 percent on Tuesday, with a sharp pullback late in the session from stronger gains underlining the fragility of sentiment. S&P 500 futures traded in Asia fell 0.5 percent, pointing to a weaker start on Wall Street later.

Turbulence on global markets since late July has been driven by investors’ twin fears of renewed recession in the United States and the chaos that Europe’s sovereign debt crisis could inflict on the financial system if it continues unchecked.

Expectations have risen among market economists that Greece will be forced soon to default on its massive debts, with uncertain consequences for both the exposed European banking sector and other struggling euro zone nations.

There is also concern that, while Europe’s rescue vehicle has been able to cope with bailing out Greece, Portugal and Ireland, its resources would be overwhelmed if a bigger nation such as Italy or Spain were to need help.

Eurozone Rate Cut

The euro was little changed around $1.3575 , having climbed as far as $1.3665 on Tuesday amid reports that euro zone policymakers were looking at ways of leveraging the rescue fund to boost its available funds.

The single currency has still lost 5.5 percent so far this month but is off an eight-month low of $1.3360 hit on Monday.

Currency strategists at RBS lowered their forecast for the euro through to the end of 2012, citing expectations of an interest rate cut by the European Central Bank next month that would narrow the single currency’s yield advantage.

The yen rose as Japanese exporters sold dollars and euros ahead of the quarter-end and Japan’s financial half-year. Traders also cited euro selling by Japanese investors repatriating proceeds gained from coupon payments on their foreign bond holdings.

The euro fell 0.4 percent against the yen to around 103.82, while the Japanese currency made similar gains against the dollar to about 76.48 .

The dollar, which along with U.S. Treasuries has supplanted gold in recent weeks as the asset of choice for safe haven seekers, rose 0.4 percent against a basket of currencies .

The firmer dollar hit commodities priced in the U.S. currency, with U.S. crude oil futures <CLc1> falling 1.4 percent to $83.23 a barrel and Brent crude dipping 0.8 percent to $106.32.

Copper slid 2 percent to $7,430 a tonne, while gold fell 0.5 percent to around $1,640 an ounce.

Credit market players reported improved sentiment, despite a slight widening of spreads on iTraxx’s benchmark Asia ex-Japan investment grade corporate bond index.

Japanese government bonds, which have been boosted in recent weeks by their safe-haven appeal, were flat, with some investors taking profits after the benchmark 10-year yield - steady on the day at 1 percent - fell as low as 0.965 last week.

Investors say they have never had a good time buying 10-year bonds below 1 percent," said Koji Ochiai, chief market economist at Mizuho Investors Securities.

Date created : 2011-09-28


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