Shares slump after South Korea rate cut

2012-07-12 08:32

Tokyo - Asian shares slid on Thursday as a surprise rate cut from South Korea and an unexpected slump in Australian employment deepened worries about global economic growth.

The news weighed on sentiment already hurt after minutes from a Federal Reserve meeting in June showed conditions may need to worsen before policymakers possibly buy more bonds to stimulate the US economy, as well by US corporate profit warnings and weak results in Europe that have fed expectations for a depressing earnings season.

The decision by South Korea's central bank to cut rates for the first time in more than three years follow a raft of rate cuts over the past week from Europe to Brazil and China aimed at ameliorating the impact of the eurozone's debt crisis.

"This was made due to concerns on global economic woes, and along with cuts in major economies," said Park Hee-chan, economist at Mirae Asset Securities.

MSCI's broadest index of Asia-Pacific shares outside Japan slumped 1.1% to a new low for the month. Australian shares extended their losses after the jobs data to fall 0.5%.

Hong Kong shares led the region's decline with a 1.7% fall, with investors wary about China's second-quarter gross domestic product report due on Friday which is likely to show the slowest growth in at least three years.

Japan's Nikkei average fell 1.1% ahead of the outcome of a Bank of Japan policy review.

Australian employment fell by 27 000 in June against a flat outcome forecast, a surprisingly weak result that also sent the local dollar lower and led investors to price in a greater chance of further cuts in interest rates.

"This suggests the economy is growing at a fairly moderate rate," said Michael Blythe, chief economist at Commonwealth Bank.

"The Reserve Bank is sending signals that they are happy with rates for the moment. Any deterioration in the labour market...means an easing bias is still in."

The Fed's minutes lifted the dollar index, measured against a basket of key currencies, to a two-year high of 83.61 and pushed the euro to two-year low of $1.2212. In Asia time, both the dollar index and the euro eased 0.1%.

Brent crude held above $100 a barrel while US crude erased earlier gains to fall 0.2% to $85.63.

Flight to debt continues

Europe made a small step forward on Wednesday when Spain unveiled new austerity measures, although it is still skirting around a key issue of creating a structure to cap surging borrowing costs in struggling eurozone member states.

The European Union welcomed the measures, while Spanish shares rose and the country's 10-year bond yields eased further from a critical 7% level seen as unsustainable for an economy.

But investors were showing no sign of departing from safe assets yet, snapping up government bonds at or near record low yields.

Japanese data showed foreign investors bought a net ¥1.54 trillion in short-term bills in the week to July 7, nearly double the amount in the previous week. Foreigners have been net buyers of short-term Japanese government bills for a third week in a row.

US benchmark 10-year Treasury yields fell as low as 1.45% on Wednesday, only one basis point above their record low, after a sale of new notes drew huge demand.

Germany also paid a record low average yield of 1.31% for its 10-year bond auction on Wednesday.

Falling Spanish yields continued to lend support to Asian credit markets, which defied declines elsewhere. The spread on the iTraxx Asia ex-Japan investment-grade index was 3 basis points tighter.