Asia shares edge up but vulnerable on Greece risks

Reuters: Asian shares steadied on Thursday but remained vulnerable amid signs that European leaders were unable to deliver meaningful measures to resolve the region’s deepening debt crisis, heightening the risk of Greece leaving the currency bloc.

European Union leaders, at an informal meeting on Wednesday, said they wanted Greece to stay in the euro zone while respecting commitments it had made in return for its bailout, but have been advised by senior officials to prepare contingency plans in case Greece exits.

The murky outlook for the future of the euro zone and fears that the crisis could derail the global economy have prompted investors to park their money in safe-haven assets such as US and German government bonds, the US dollar or cash.

Markets shrugged off China’s HSBC Flash Purchasing Managers Index, the earliest indicator of the country’s industrial activity, which retreated to 48.7 in May from 49.3 in April, suggesting persistent weakness in the world’s second-largesy economy even as policymakers seek to shore up growth.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.1 per cent after briefly easing 0.1 per cent on the Chinese data. Japan’s Nikkei stock average fell 0.3 per cent.

US stock futures were slightly lower.

“Greek jitters and dashed hopes that euro zone leaders will take any decisive actions in the near-term have been priced into the markets, but lingering uncertainty also means that the index is trapped both ways,” said Kim Seung-han, an analyst at HI Investment & Securities, of Korean shares, which rose 0.3 per cent.

Europe will also report regional manufacturing PMI figures later in the session. Weak readings could accelerate selling in the single currency as they would highlight the damage to economic fundamentals from Europe’s failure to fix its debt refinancing and banking instability.

The dollar index on Thursday eased from its highest since September 2010 of 82.221 reached the previous session.

Ashraf Laidi, chief global strategist at City Index, said the index could climb towards 90 later this year, citing potential catalysts such as a mismanagement of a Greece exit from the euro zone, or if Athens and its global lenders remained deadlocked.

US 10-year yields fell to 1.73 per cent on Wednesday, nearing 1.67 per cent set in September, which was the lowest in at least 60 years.

Strong bids resulted in Germany selling its first-ever zero-coupon two-year bonds on Wednesday.

The euro was down 0.1 per cent at $1.2573, just above its lowest level since July 2010 of $1.25453 hit the previous day.

The yen was stuck against the dollar at around 79.50 yen while not far from its highest in more than three months of 99.531 yen against the euro hit on Wednesday.

Yields around the world falling to low levels slows an outflow of capital from Japan even if the dollar or the euro cheapens against the yen, while the ‘risk-off’ mood prompts Japanese investors to hold the yen, said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase Bank in Tokyo

“This dampens yen selling incentives. It’s a flip side of a yen strengthening but these factors are not positive incentives to buy the yen. It reflects a decreasing number of people selling the yen,” Sasaki said.

EUROPE DIVIDED

Sasaki said the euro would remain depressed because even if uncertainty over Greece is cleared, that does not resolve the broader issue of the euro zone’s debt crisis.

Analysts said that with European leaders at odds over specific schemes to prevent a contagion from political turmoil in Greece and to help stabilise fragile banking systems, it was hard to build positions in risk assets.

Many alternatives remained available such as bank capitalisation through the euro zone’s temporary bailout fund and looser monetary policy by the European Central bank, yet European policymakers do not seem ready to move in that direction, Barclays Capital analysts said in a research note.

“Therefore we prefer to stay in ‘risk off’ mode,” they said. Europe also faces the need to stem the fallout from a winding up or restructuring of bad banks.

Spain announced a 9-billion-euro bailout for troubled lender Bankia, its fourth-largest, on Wednesday, while also seeking ways to help its highly indebted regions meet huge refinancing needs.

US crude futures recovered 0.8 per cent to $90.66 a barrel on Thursday, after ending down 2.1 per cent, while Brent was up 0.7 per cent at $106.33, after settling down 2.6 per cent.

Asian credit markets stabilised, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by just one basis point.