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Shares down again on Greek turmoil

May 16 2012 07:27

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Tokyo - Asian shares fell and the dollar rose broadly on Wednesday after efforts to form a new government in Greece collapsed, fuelling fears that a second election in June could precipitate Athens' exit from the eurozone and deepen the bloc's debt crisis.

Investors continued to reduce positions in riskier assets, leading to a fall of more than $1 in oil prices and a drop to a 4-month low for spot gold, while lifting the dollar which tends to be seen as safe haven in times of heightened uncertainty.

"It's part of the risk-on, risk-off trade that we've had for the past two years and we are still stuck in it, looking for the next catalyst," said Andrew Pease, Sydney-based chief investment strategist at Russell Investments Asia Pacific, adding that markets may be risking becoming too pessimistic again.

MSCI's broadest index of Asia-Pacific shares outside Japan extended losses for the fourth consecutive day, sliding 2% to a new 4-month low after retreating as much as 1.1% on Tuesday. The index has fallen more than 8% since May 2.

The materials and energy sectors led the declines, and took a toll on resources-heavy Australian shares which slipped 1.8%.

In addition to Greek jitters, financials pulled Hong Kong shares down more than 2% after a mainland newspaper reported flat loan growth for the first two weeks of May by the country's "Big Four" state-owned banks, adding to concerns about an economic slowdown following weak data last week.

Japan's Nikkei average shed 0.9% to a 3-1/2 month low.

Greek exit
 
Greek political leaders meet on Wednesday to establish a caretaker government that will lead the country into its second election in just over a month.

Financial markets have been rattled by the prospect that a victory by leftists opposed to harsh austerity measures that are a condition of an international bailout could put both Greece's euro membership and the euro zone's fiscal consolidation efforts at stake.

A Greek exit from the euro may be manageable given the relatively small size of its economy, but a far more significant issue is the potential knock-on impact on unpopular restructuring policies agreed by other struggling economies such as Italy and Spain.

"The direct costs of a Greek euro exit would be huge for Greece, but manageable for the rest of the euro area. Our concern is contagion," said Michala Marcussen at Societe Generale.

"A speedy and forceful response would be required to stem this ... It's a question of political will."

Global stocks fell and European shares hit their lowest closing level since the start of 2012 on Tuesday.

The benchmark Athens index plunged 3.6% to a fresh 20-year low, and ongoing concerns over Spanish banks knocked Spain's IBEX index down to its lowest level since late 2003.

Commodities pressured
 
The euro held steady around $1.2732, after touching a 4-month low of $1.27215 on Tuesday. The Australian dollar, closely linked to risk sentiment, hit a 5-month low of $0.9917. The dollar index, measured against a basket of major currencies, rose to a 4-month high of 81.340.

Spot gold fell to a 4-1/2 month low below $1 540 an ounce, weighed by the euro's sluggishness and investors seeking to cash in.

"Everybody is rushing to buy the US dollar. A strong dollar is negative for gold for the time being," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, adding that demand from jewellers was limited due to volatile prices.

Risk aversion continued to weigh on Asian credit markets, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 9 basis points.

Two-year Japanese government bond yields fell to a 7-year low below 0.10% on Wednesday on growing concerns that Greece might eventually exit the eurozone.

On Tuesday, Greek contagion concerns pushed Italian 10-year government bond yields above 6% for the first time in 2-1/2 months. Italy tracked Spain higher, with Spanish bond yields staying over 6%.

"To arrest market fears, proactive measures are needed," said Barclays Capital in a research note.

"Unfortunately, they seem nowhere in sight. This suggests that risky assets are likely to trade erratically at best, with a bias to underperform."

Oil fell on Wednesday, with US June crude slipping 1.2% to $92.87 a barrel, while Brent crude fell 0.8% to $111.30 a barrel.

Later in the session, the US Federal Reserve's minutes of its April meeting will be released to possibly offer insight into the probability of a further quantitative easing.
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