Asia stocks bounce after volatile week; euro zone in focus

Reuters: Asian shares bounced on Monday and European stocks looked set to follow as investors returned to pick up bargains, while havens like gold and the Swiss franc lost appeal.

But broader markets remained fragile ahead of a key Franco-German summit that may offer a solution out of the spreading debt crisis.

A 0.8 percent rise in U.S. stock futures encouraged selective buying in Asian equities, but all eyes were on the summit and euro zone second-quarter GDP data, both on Tuesday, for more clues on the global economic outlook and the policy response needed to tackle Europe’s debt quagmire.

Japan’s Nikkei rose 1.4 percent after main Wall Street indices advanced on Friday, but without the wild intra-day swings that marked trading last week when the S&P 500 moved at least 4 percent up or down for four consecutive days.

This was only the third time such volatility had rocked markets since the Great Depression in the 1930s, according to research by BofA-Merrill Lynch.

European shares were also expected to open higher and extend their rebound to three straight sessions. Financial spreadbetters saw Britain’s FTSE opening 0.5 percent higher and Germany’s DAX opening up 0.8 percent.

Japanese shares were also boosted by data showing Japan’s economy shrank less than expected in April-June following a devastating earthquake and tsunami in March.

Asian stocks outside of Japan rose by 2.1 percent, after tumbling nearly 4 percent last week, with key indexes in Hong Kong and Australia up over 2 percent.

Frances Cheung, senior strategist at Credit Agricole in Hong Kong, said the meeting between the leaders of France and Germany on Tuesday would be crucial to determining whether any longer-term solution to the euro zone’s debt crisis is in the works.

“There is still a huge focus on money markets ... and looking at them shows not everything is solved,” she said.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Paris to hammer out a solution to the debt crisis which has shown signs of engulfing the big economies of Italy and Spain and heightened strains in money markets to levels not seen during the 2008 crisis.

While dollar funding costs evident from cross currency basis swap rates in dollar/yen and dollar/euros have cooled from last week’s peaks, they are still at elevated levels.

On a valuation basis, the MSCI index of Asia stocks outside Japan trades at 11.5 times forward 12-month earnings, according to Thomson Reuters I/B/E/S, above the 7.9 times seen during the depths of the 2008 financial crisis.

That suggests investors may still not be in a hurry to buy despite the 13 percent decline over the last two weeks.

Markets also remain vulnerable to declines as debt cutting plans in Europe and the United States threaten to act as a further drag on already weak economic growth at a time when latest data has been patchy.

U.S. consumer sentiment plunged to its lowest level since 1980 in early August, data showed on Friday, though July retail sales rose 0.5 percent.

FRANC TUMBLES

Adrian Foster, head of markets research for the Asia-Pacific region at Rabobank International, said markets would start focusing again on fundamentals such as corporate balance sheets and consumer spending after the volatility in recent weeks.

Signs that equities might have marked a temporary bottom after last week’s volatile moves and persistent chatter that Swiss authorities may peg the franc against the euro to battle its surge sent the safe-haven currency tumbling by 2 percent against the euro and the dollar.

The euro, which plumbed a record low around 1.0075 francs last week, climbed to a high of 1.1351 francs, up from 1.1079 late in New York on Friday.

But Barclays Capital analysts warned expectations of a peg seemed overdone, believing the franc would rally once again this week if markets started to change their view on its probability.

“We remain CHF bears in the medium run - we agree with the SNB’s view that it is “massively overvalued” - but, this week, we are not expecting the recent appreciation of EUR/CHF to hold,” said Paul Robinson, strategist at Barclays Capital.

The drop in the franc rippled over into gold markets with the precious metal slipping more than 1 percent in early trade after a 1.5 percent slide in the previous session.

Gold, which had gained 9 percent so far this month before Friday’s slide, later pared most of its losses and stood at $1,740 an ounce by mid-afternoon.