Shares gain on easing hopes

2012-07-03 08:25

Tokyo - Asian shares rose on Tuesday on expectations that major central banks will take further policy steps to support the fragile economy, after manufacturing data around the world highlighted the drag on growth from the protracted eurozone debt crisis.

Monday’s data showing US manufacturing contracted for the first time in nearly three years raised speculation the Federal Reserve will again step in to boost the economy and support Wall Street. The Fed last month extended the duration of a programme aimed at forcing longer-term rates down.

Many market players believe continued economic weakness will push the Fed into a third bout of quantitative easing (QE) - the policy of creating money to fund asset purchases that has lifted riskier assets such as shares and commodities in the past.

Traders also expected the European Central Bank to move to bolster the region’s economy by cutting its main refinancing rate by 25 basis points to 0.75% at its policy meeting on Thursday.

European shares were likely to extend gains, with spreadbetters predicting that region’s major markets would open as much as 0.5% higher. US stock futures were up 0.1%  

MSCI’s broadest index of Asia-Pacific shares outside Japan added 1% and Japan’s Nikkei average rose 0.6%.

Chinese shares outperformed in Asia, with Hong Kong’s Hang Seng index rising 1.6% to above its 200-day moving average, catching up on Friday’s global rallies after a holiday the previous session.

“I think we’re still seeing some post-EU summit fervour in Hong Kong as well as expectations that the ECB is going to follow through on Thursday by cutting interest rates,” said Tom Kaan, a director at Louis Capital Markets in Hong Kong.

Hopes for more monetary easing supported gold, which usually benefits as a hedge against rising prices as ample money supply and low interest rates sow the seeds of future inflation. Spot gold rose 0.4% at $1 603 an ounce.

“The market is enjoying the mood right now with the ECB in all likelihood poised to follow in the same footsteps as European leaders who have taken substantial measures to address their problems and calm fears of a systemic risk,” said Han Bum-ho, an analyst at Shinhan Securities.

Supporting expectations of a rate cut, the jobless rate in the eurozone rose to a record high in May and a measure of factory activity in the region held steady at its lowest level since June 2009.

Australia’s central bank on Tuesday kept its main cash rate steady at 3.5%, saying there has already been a material easing in monetary policy over the past six months.

Oil steadies

As riskier assets such as stocks crawled higher, oil erased earlier losses.

US crude futures gained 0.8% at $84.43 a barrel and Brent climbed 0.9% to $98.24 a barrel as escalating tensions between Iran and the West offset concerns gloomy global manufacturing activity will hurt oil demand. 

London copper surged more than 2% to a session high of $7 790 a tonne, its highest since May 22, on hopes for monetary stimulus.

The Australian dollar, which is also often viewed as a gauge of risk appetite due to its sensitivity to demand for commodities, inched up 0.1% to $1.0260 against the dollar. It kept its recent uptrend against the euro at A$1.2275.

The eurozone’s ongoing debt crisis continues to weigh on the euro, but its impact on other currencies appears to be diluting, said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.

“The US manufacturing data stood out in its surprising weakness, but it’s premature to judge the economy is slumping until we see more data such as industrial output for June,” he said.

Euro clearly pressured   

The euro nudged up 0.1% at $1.2595, above Monday’s low of $1.2568 but well below Friday’s high of $1.2693.

Finland and the Netherlands opposed a plan for the eurozone’s permanent bailout fund to buy government bonds in the secondary market, highlighting implementation hurdles from a surprise agreement last week by European leaders to let their rescue fund inject aid directly into stricken banks and intervene in bond markets to support highly indebted states.   

After the initial euphoria that followed Friday’s deal, markets quickly shifted focus to potential risks such as the insufficient size of the rescue fund and the ratification process in each member state.

For the euro to find a solid floor the Spanish 10-year yield must hover below 5.94%-5.99% and Italy’s 10-year yields need to clearly fall below 5.38%, Barclays’ Yamamoto said.

Improvement was limited in Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing marginally by 2 basis points.