Asian shares edge up, Spanish debt costs curb risk appetite

Reuters: Asian shares edged higher but the euro eased on Tuesday, as a relief rally from last week’s heavy selling proved short-lived, with a surge in Spanish borrowing costs adding to simmering worries about Europe’s debt restructuring challenges.

The euro was down 0.1 percent at $1.2530, just above its 2-month low of $1.2495 hit on Friday, while the Australian dollar, often seen as a gauge for risk appetite, fell 0.2 percent to $0.9830.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.6 percent, after having shed as much as 0.3 percent earlier, and remained near its lowest level since late December touched on Friday.

Japan’s Nikkei average .N225 bucked the regional trend and fell 0.4 percent. .T

“It’s hard to pin down a single, most worrisome issue amid a pile of bearish factors, and as such, investors are keeping cash at hand and staying sidelined,” said Tetsuro Ii, president of Commons Asset Management.

Banks in troubled euro zone economies such as Greece and Spain appear to be seeing their deposits flee to German or Swiss banks, a move that could potentially trigger a fresh crisis if those vulnerable banks face liquidity shortages, Ii said.

“All these fears are weighing on stocks worldwide, but there are individual companies with solid earnings and growth prospects. The macro environment is disastrous, but it now offers a bargain for stocks which are cheap from a technical and valuation point of view,” Ii said, adding that his firm has been buying Japanese stocks regularly during the recent sell-off.

Greece’s inconclusive election earlier this month rattled markets and left sentiment shaky ahead of a crucial second vote on June 17.

Athens managed to hand 18 billion euros to its four biggest banks on Monday, via bonds from the European Financial Stability Facility rescue fund, allowing the stricken banks to regain access to ECB funding.

But Spain, with its banking sector saddled with bad loans, looked set to use more public debt to recapitalise fragile lenders, raising concerns about a ballooning public debt making its refinancing efforts even more difficult amid surging borrowing costs.

Spanish 10-year bond yields jumped to 6.53 percent on Monday - their highest since November 2011 - pushing the yield premium over safe-haven German Bunds to 515 basis points, its widest in the 13-year history of the euro.

A 10-year sovereign debt yield exceeding 7 percent is widely perceived as unsustainable for an economy, and could force the country to seek an international bailout, as was the case for Greece, Ireland and Portugal.

SEEKING PIVOTAL CATALYST

The climb in Spanish yields underscored the lack of confidence in Madrid’s ability to stabilise its finances and banking sector.

“Everything is lined up for a corrective week for risk assets,” said currency strategist Kit Juckes at Societe Generale in a note to clients.

“The release of the U.S. labor report on Friday could potentially be pivotal for risk appetite. Many investors and traders will want to have light(er) positions in the run-up.”

The euro failed to follow through on its short covering rally on Monday, remaining under strong selling pressures. Traders said a break below $1.25 could accelerate its downward spiral.

“And that could bring the wider risk bounce to a pretty sharp end. It’s all a story of a squeeze that never really squeezed shorts out,” Juckes said.

As investors sought the safety of U.S. dollars, the dollar index, which tracks its performance against a basket of major currencies, was down 0.2 percent at 82.283 but still near Friday’s high of 82.461, its strongest since September 2010.

Asian credit markets softened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 2 basis points.

Other riskier assets were mixed, with U.S. crude up 0.3 percent at $91.09 a barrel but Brent down 0.1 percent at $107.05. On Monday, Brent rose as high as $108.04, supported by resurfacing Middle East oil supply worries amid minimal progress in talks over Iran’s nuclear programme.

Copper struggled, sticking around $7,684.25 a tonne after a three-session winning streak during which it had risen 2 percent by Monday’s close of $7,685.

“The focus has never been just about Greece, but on countries like Spain and the risks of a contagion, and now with bond yields at dangerously high levels we are going to see markets on edge again,” said Michael Creed, an economist at National Australia Bank.