Asian shares steady, US budget concerns weigh

Reuters: Asian shares steadied in quiet pre-holiday trade on Monday from a slump late last week, with prices capped by nervousness about the risk of the United States failing to avert a fiscal crisis. European shares will likely be subdued, with financial spreadbetters predicting London’s FTSE 100 and Paris’s CAC-40 to open steady to 0.1% higher.

Activity in other assets was also subdued, with spot gold steadying as investors took to the sidelines, while oil extended losses, with US crude inching down 0.2% to remain below $ 89 a barrel while Brent futures eased 0.3% to $ 108.70.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.1% after falling to a near two-week low on Friday when House of Representatives Speak John Boehner failed to gain support for a tax plan, raising fears the US may not be able to avert the “fiscal cliff” of automatic spending cuts and tax increases set to start 1 January.

The White House on Friday tried to rescue stalled talks but there was little headway as lawmakers and President Barack Obama abandoned Washington for Christmas. Many market players still expect both sides to reach a compromise before the year-end deadline but heightening tensions were likely to stifle trade already slowed by the holidays.

“It’s all about the US fiscal cliff issue,” said Victor Shum, managing director at IHS Purvin & Gertz. “The chances are that we will get a deal between the White House and the Republicans, but the fact that Boehner failed to get members to support his plan is worrying.”

Australian shares advanced 0.25% in a shortened session before the Christmas break, lifted by blue chips, but trade was extremely thin with many players already away.

The Hang Seng Index closed up 0.2%, with Hong Kong financial markets shut at midday for the Christmas holiday and resuming trading on Thursday. Shanghai shares outperformed their peers with a 0.5% rise on expectations for more public funds’ allocations.

South Korean shares edged up 0.1% in light trading before Christmas Day, with the weakening Japanese yen and US fiscal uncertainty keeping investors uneasy. Japanese financial markets are closed for a public holiday and will resume trading on Tuesday.

The dollar inched up 0.2% to 84.35 yen, having fallen below 84 yen on Friday. The dollar hit a 20-month high of 84.62 yen on 19 December.

The yen has been pressured by expectations the Bank of Japan will be compelled to adopt more drastic monetary stimulus measures next year as incoming prime minister Shinzo Abe demands action by the central bank to bring Japan out of decades-long deflation.

Abe stepped up pressure over the weekend, saying on Japanese television that he will try to reform a law guaranteeing the BOJ’s independence if his demand for a binding inflation target is not met.

Currency speculators increased their bets against the US dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday. Bets against the yen fell after reaching a more than five-year peak.

But market players generally see the dollar staying firm for now as the US fiscal impasse will likely continue to sap investor appetite for risky assets and raise the dollar’s safe-haven appeal.

“It looks like all momentum for the fiscal cliff negotiations is gone,” said Rob Ryan, strategist for RBS in Singapore. While the dollar could be swayed by year-end flows, “on balance I would see a stronger US dollar into the end of the year,” Ryan said.

EPFR Global, a fund-tracking firm, said on Friday that investors around the world pulled $ 4.1 billion from bond funds worldwide during the week ending 19 December, the most since August 2011, and favoured riskier exchange-traded funds despite the US budget tussle.

ETFs are generally believed to represent the behaviour of institutional investors, and can be used opportunistically to bet on various indexes.

Focus for the euro zone next year will turn to Italy, where Mario Monti announced on Sunday, two days after his resignation, that he would consider seeking a second term as Italian prime minister if approached by allies committed to backing his austere brand of reforms.

Stakes will be high at a parliamentary election set for 24-25 February, as the world’s eighth largest economy suffers from recession and public debt exceeding $ 2.6 billion, have aggravated investor concerns about growth and stability in the euro zone.

Italy faces a huge bond redemption in the first quarter of 2013 and a failure to secure funding could refuel concerns about sovereign financing not only in Italy but also similarly-indebted Spain, battering confidence in the euro.