Asian shares retreat dimming outlook for growth

Reuters: Asian shares retreated from a two-week high on Friday as investors scaled back their expectations of strong stimulus from the US Federal Reserve and fretted about economic growth after manufacturing surveys from the euro zone and China depicted a bleak outlook.

Senior Fed official James Bullard said US data had been somewhat better since early August and the Fed’s July 31-August 1 minutes, which had indicated a third round of monetary stimulus, or quantitative easing (QE3), might be in store, were “a bit stale”.

Bullard’s comments, and business surveys in China and the euro zone showing the world economy was dwindling, put a brake on a global market rally that had been spurred by the release of the minutes on Wednesday.

European equities were likely to follow Asia lower, with financial spreadbetters called London’s FTSE 100, Paris’s CAC-40 and Frankfurt’s DAX to open down as much as 0.4%.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 1.2% and was set for a weekly loss of 0.5%. Its materials sector led the declines on concerns over weak demand stemming from sluggish Chinese manufacturing activity, sending shares of resource-rich Australia down 0.9%.

Hong Kong shares slumped 1.1% and Shanghai shares shed 0.7%.

“China is more about timing. It’s about when we get more policies ... because things are already bad,” Francis Cheung, CLSA’s China-Hong Kong equity strategist. “I don’t see much more easing ... until the political transition is complete, so there’s bit of a policy paralysis until then.”

Japan’s Nikkei stock average slid 1.4%.

A Reuters poll showed on Friday that big Japanese manufacturers’ sentiment worsened in August.

The euro was underpinned by sustained hopes of European Central Bank action to rein in surging sovereign debt yields in Spain and Italy, which have prompted investors to close their extremely bearish bets against the single currency.

The euro traded at $1.2560, near a seven-week high of $1.2590 hit on Thursday. The dollar inched up 0.1% to 78.56 yen.

“All of what’s been out so far regarding the euro zone is not a ‘done deal’, and could be interpreted both positively and negatively, but because there is no clear sense of direction, investors are covering short positions in the euro,” said Junya Tanase, chief currency strategist at JPMorgan Chase.

“There is still some more scope for the euro short-covering given the size of such positioning, unless conditions deteriorate significantly,” he said, adding that one such gauge would be a jump in 10-year Spanish yields above the critical 7% widely seen as unsustainable for a country’s financing.

The ECB earlier this month indicated it may resume buying government bonds to drive down borrowing costs in Spain, and investors were hoping the ECB would provide details of its bond-buying scheme as early as at its September 6 meeting.

Markets also expect a favourable German Constitutional Court ruling on the euro zone bailout fund, scheduled for September 12, to pave the way for a funding safety net against the debt crisis.

Ahead of a German-Greek meeting on Friday, Germany and France kept pressure high on Greece, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets.

Sources told Reuters on Thursday that Spain was in talks over possible aid, although Madrid has not made a final decision to request a bailout and no specific figure has been discussed.

US manufacturing activity improved slightly in August, but weekly jobless claims unexpectedly ticked higher last week, and such a mixed picture kept alive expectations for some kind of monetary easing other than the QE3 at the Fed’s September meeting.

Spot gold traded at $1,666 an ounce, off its 4-1/2 month high of $1,674.80 hit on Thursday. It has recovered more than half of the decline from its 2012 highs and lows, and looked technically bullish after breaking above its 200-day moving average on Thursday, which had served as a firm resistance since late March.

“The technical breakthrough underscores investor perception for a prolonged period for monetary easing,” said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.

“Money is flowing into gold exchange-traded funds this month and picking up,” he said, adding that Fed Chairman Ben Bernanke may suggest the Fed’s strong commitment to an extended period of an accommodative stance at the central bank’s annual meeting at the end of this month in Jackson Hole, Wyoming.

Oil eased, with US crude down 0.6% to $95.68 a barrel and Brent falling 0.4% to $114.52.

Copper fell 0.9% to $7,615.75 a tonne on demand worries, slipping from a one-month high on Thursday.

With the retreat in shares, Asian credit markets weakened, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 3 basis points.