Asian shares slip on weak US data, Italy debt sale eyed

Reuters: Asian shares slipped on Thursday as weak US retail sales data raised concerns about sluggish economic growth, while an Italian debt auction later will test market confidence in whether Rome can avoid becoming the next victim of the euro zone crisis.

Traders expected market activity to slow approaching a cliff-hanger Sunday election in Greece, which could precipitate the country’s exit from the euro zone.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6 per cent, with China and Australia leading the decline, while Japan’s Nikkei average shed 0.7 per cent.

“I would expect low volume in today’s session with risk aversion dominating the mind-set of investors leading up to the Greek election on Sunday,” said Miguel Audencial, trader at CMC Markets in Sydney, where stocks fell 0.5 per cent.

European shares and Wall Street ended lower on Wednesday, while the dollar fell, after data showed US retail sales hit their worst level in two years in May. Safe haven gold rose.

The report could fuel speculation the Federal Reserve may take further stimulus measures at its policy meeting next week to support the US economy, after a weak May jobs report added to fears about the euro zone and sparked a broad market sell-off earlier this month.

The euro was steady around $1.2562, caught in the middle of recent highs and lows - well above the near two-year low touched on 1 June at $1.2288, but below a three-week high reached on Monday at $1.2672.

The euro’s relative stability after a sharp downgrade in Spain’s credit rating by Moody’s Investors Service on Wednesday was seen as an indication of the extremely bearish stance already taken by investors before the Greek election.

“It tells you much about how bearish market expectations are when a three notch downgrade of Spain pushes EUR/USD 15 pips lower,” said Sebastian Galy, strategist at Societe General.

“Asia will not be happy with poor US GDP growth, leading to some nervousness in these (equities) markets. The fear should peak with the Italian bond auction,” he said, noting that the disappointing retail sales could lead to lower GDP forecasts.

US crude fell 0.1 per cent at $82.58 a barrel and Brent crude futures eased 0.3 per cent at $96.88.

Activity was subdued in Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index, or the cost of insuring against corporate and sovereign defaults in Asia, widening by 1 basis point.

Greeks were pulling their cash out of the banks and hoarding food ahead of Sunday. The last published opinion polls showed conservatives who back the 130-billion-euro bailout that is keeping Greece afloat were neck-and-neck with leftists, who are against the rescue deal but want to keep Greece in the euro zone.

Worries about Spain’s financing problems were magnified by the three-notch rating downgrade to Baa3 by Moody’s, which said the newly approved euro zone plan to help Spain’s banks will increase the country’s debt burden.

Spain’s woes have raised speculation that a similarly indebted Italy could be next in line to seek help, prompting technocrat Prime Minister Mario Monti to urge Italy’s politicians on Wednesday to back his tough economic medicine.

Investor jitters have kept yields on sovereign debts of both Spain and Italy at elevated levels, with Italy facing a test later on Thursday with its debt sale of up to 4.5 billion euros.

Gold had been sold off along with a broad market slide, underscoring the depth of investor jitters, as investors cashed in to cover losses in riskier assets and preferred cash over bullion amid heightening fears over the fate of the euro zone and global growth slowdown.

Such behaviour has kept an inverse relationship this year between gold and the CBOE Volatility index, Wall Street’s so-call “fear index” that measures expected volatility in the Standard & Poor’s 500 index over the next 30 days.

But a trend may have emerged this month for gold to reclaim its safe-haven status, with gold prices climbing in tandem with mounting risk aversion as reflected in the rise in the VIX.

Spot gold was steady around $1,616.80 an ounce after rising 0.5 per cent on Wednesday, while the VIX rose 2.18 per cent on Wednesday.