Tokyo - Asian shares and the euro eased on Thursday as concerns about the ability of eurozone countries to refinance their huge public debt dampened investor risk appetite ahead of a French bond auction later in the day.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2% after rising to its highest in nearly a month on Wednesday. Japan's Nikkei stock average shed 0.5%, slipping from a three-week high hit the day before.
European shares fell on Wednesday after Italy's UniCredit SpA launched a €7.5bn rights issue at a huge discount, reflecting the difficulty some European lenders are facing to raise capital to repair their weakened balance sheet.
The euro eased 0.1% to around $1.2925 on Thursday, nearing a 2011 low of around $1.2856 hit on December 29. A break below that would take it back to levels not seen since September 2010. The euro stayed below ¥100, not far above ¥98.71 hit on Monday, its lowest since late 2000.
"Eurozone debt worries persist and the euro is basically on a declining trend, while undergoing short-term swings depending on the degree of risks," said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch in Tokyo.
France plans to raise up to €8bn in long-term debt on Thursday, following Wednesday's subdued 10-year German Bunds auction, which nevertheless was a sharp improvement from November when the debt offering could have failed without purchases from the European Central Bank.
A key litmus test for investor confidence is next week's debt sales by Spain and Italy, the two countries most exposed to the crisis.
"The French bond sale is probably not as big a risk but Italy is a different story," said Fujii.
US stocks fared better than European peers, ending nearly flat on Wednesday after data showed new US factory goods orders rose solidly in November while business capital spending cooled.
"Europe still lacks a credible mechanism to rekindle growth, and without growth the crisis can only intensify," said Russell Jones, analyst at Westpac Bank.
Asia bond market
Asian credit markets were subdued, with spreads on the iTraxx Asia ex-Japan investment grade index barely changed.
Issuance activity is picking up, however, with the Philippines becoming Asia's first issuer of foreign-currency sovereign bonds, saying on Thursday it raised $1.5bn from the sale of 2037 global bonds. A quarter each were sold to investors from the Philippines and the rest of Asia, with the United States taking over a third and Europe 15%.
The Export-Import Bank of Korea, which raised $2.25bn in global bonds also early on Thursday, aims to raise $11bn mostly in bonds abroad this year by exploring non-dollar markets, up from $10.3bn it raised last year.
"The acute problem that the European area is having at the moment is causing investors to look to diversify their risk," said Kenneth Akintewe, Singapore-based portfolio manager at Aberdeen Asset Management, who helps manage Asian fixed income.
The Asian bond market may be supported by appetite from the region's big institutional players as well as a favourable macro backdrop, with policymakers generally shifting gear to pro-growth from an anti-inflationary stance, he said.
The currency risk is key, as hedging costs rise with higher volatility, and while volatility is here to stay, market players may have adjusted somewhat from the past year's turbulence.
"The market is now aware of what kind of risk factors they have to contend with, which provides a little bit of a buffer in terms of the degree of the sell-off we can anticipate now," said Akintewe.
"We need to actually see things that are even worse than last year taking place to see the market sell-off to the same degree as seen in the past several months."
On top of the eurozone debt crisis and its impact to the financial system, European shares and the euro may be weighed further by geopolitical risk as tension escalates between Iran and the West, which is forging a concerted campain to hold back Tehran's nuclear programme.