Asian shares, Euro spooked by Cyprus bailout details

Reuters: Asian shares eased and the Euro wobbled on Tuesday as investors worried about potential risks from the Cyprus bailout scheme, after initial rallies on the last-minute rescue provided opportunities to book some profit.

“The market had been positioned for a good result on Cyprus, they got it and now there’s profit taking,” chief market analyst at CMC Markets Ric Spooner said.

“Bearing in mind that a crisis has been averted, the overall situation is just a reminder of the risk involved in Europe. The rescue process was fraught with politics and a risk that it would fall over, and people were contemplating that this morning,” he said.

Japan’s Nikkei stock average trimmed some of its earlier losses and was down 0.2% by late morning, after closing up 1.7% and inching closer to a 4½ year high the day before. The MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.35 after gaining more than 1% on Monday after the Cyprus deal. The materials sector led the declines with a 1% drop.

Australian shares fell 0.7% as investors sold miners and financials in response to weaker metal prices and new worries about the Euro zone, while Shanghai shares slid 1.9% and Hong Kong stocks fell 0.6%.

China shares were headed for their worst loss in three weeks, with brokerages hit by fears of more fund raising in the sector, while mid-sized banks were sold on worries about tighter mortgage lending restrictions.

South Korean shares bucked the downtrend with a 0.2% gain and Southeast Asian bourses also defied the generally cautious mood and advanced.

Revived pressure on the Euro helped lift the Dollar index, measured against a basket of major currencies, towards a 7½ month peak of 83.166 set earlier this month.

The Euro was at US$ 1.2867, after sliding more than 1% against the dollar and hitting a four-month low of US$ 1.28295 on Monday. The single currency closed below its 200-day moving average of around US$ 1.2880 on Monday for the first time since November.

Traders said the Euro could be supported by short-covering and repatriation before the end of the first quarter, but renewed concerns about the health of Euro zone’s financial system would likely set a ceiling at US$ 1.30. The Euro hit a session high of US$ 1.3050 on Monday.

Against the Yen, the Dollar was up 0.2% to 94.30, having touched a low of 93.53 Yen on Monday, barely above a recent low of 93.45 seen earlier this month.

Large, uninsured depositors and bondholders will bear heavy losses in the Cyprus bailout, which Dutch Finance Minister Jeroen Dijsselbloem, who heads the Euro group of Euro zone finance ministers, said represented a new template for euro zone and other countries which may have to restructure their banking sectors.

Initial rallies in global equities and the Euro fizzled after his remarks, as they raised the prospect of shifting more risk to depositors and stakeholders in future.

While the bailout will avert collapse of the Cypriot banking system and keep Cyprus within the Euro zone, the agreement may have set a painful precedent for the region.

“The design of the plan is setting market sentiment. Attention is put into the details and any actual contagion risk out of that plan, so overall sentiment is a little bit subdued, but not collapsing,” Frances Cheung said, senior strategist at Credit Agricole CIB in Hong Kong.

Better US data pointing to a continued recovery in the world’s largest economy provided some comfort to the market, and with investors are growing accustomed to Europeans scrambling to find a last-minute solution to avert a crisis, sentiment will not sour drastically as long as there is no collapse in the Euro zone economy, she added.

After reaching a 11-hour deal with the European Union, the European Central Bank and the International Monetary Fund to shut down the country’s second largest bank in return for 10 billion Euros in rescue funds, the president of Cyprus assured citizens the bailout deal was in their best interests. But banks will remain closed until Thursday and even then subject to capital controls to prevent a run on deposits.

Bank of Japan chief Haruhiko Kuroda, who took over as the head of the Japanese Central Bank last week, said buying longer-dated debt was a policy option to pursue monetary easing.

His comments sent benchmark 10-year Japanese Government bond yields down as low as 0.525%, its lowest level since June 2003. The 10-year yield has hit the near-decade low for a fourth straight day.

London copper was barely changed at US$ 7,617.50 a tonne while spot gold eased 0.2%, holding barely above US$ 1,600 an ounce.

The US crude futures inched down 0.1% to US$ 94.73 a barrel and Brent also eased 0.1% to US$ 108.07.