Asian shares extended gains to a third straight session today, reaching a three-month high, as investors continued to bet that policymakers will soon take decisive action to address the euro zone fiscal crisis and declining global growth.
Oil and copper eased from their highs but remained underpinned by such hopes, while the euro stabilised and safe-haven government bonds suffered from weakening demand.
But European stocks were likely to be more guarded, with US stock futures signalling a softer Wall Street start. Financial spreadbetters called the main indexes in London, Paris and Frankfurt to open down as much as 0.7 per cent.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2 per cent, after world stocks climbed to a three-month high yesterday, shrugging off soft data showing a further contraction in Italy and a fall in factory orders in Germany.
Japan’s Nikkei stock average rose 0.7 per cent.
“Markets are undergoing a small correction from excessive pessimism as the US jobs data showed that conditions were not one-sidedly taking a turn for the worse,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank, adding that a lack of negative news from Europe helped keep the tone positive.
“The source of European instability is fiscal convergence, which will take years to be accomplished, and as long as this insecurity remains, investors won’t easily let go of expectations for further monetary stimulus from the Federal Reserve to underpin sentiment and growth, bolstering equities.”
Risky assets began their rising trend on Friday after US nonfarm payrolls overshot expectations and eased concerns over its recovery, while a rise in the jobless rate kept hopes intact for the Fed to ease further next month. Markets also re-evaluated European Central Bank president Mario Draghi’s pledge for action to contain borrowing costs for Spain.
“There’s been a reassessment of risks in recent days,” said Ric Spooner, chief market analyst from CMC Markets in Sydney. “Mr Draghi’s recent comments in the eyes of the market has reduced the probability of a near term crisis in Europe.”
Investors will be turning to data from China tomorrow, including industrial output, retail sales and inflation, for indications of whether the world’s second-largest economy can regain momentum in the second half of the year.
“The immediate focus is now on growth and the key litmus test this week will be provided by Chinese data, which needs to show a convincing sign of recovery from a sluggish first half in order to sustain the renewed appetite for risk,” Kim Byung-yeon, an analyst at Woori Investment & Securities.
As risk appetite recovered on hopes that global policymakers will act to help resolve the euro zone’s three-year debt crisis, demand weakened for safe-haven assets such as government bonds, pushing 10-year Japanese government bond yield up to a one-month high of 0.810 per cent today.
Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 1 basis point and pinned near its lowest since March.
The euro eased 0.1 per cent to $1.2386, off a one-month high of $1.2444 hit on Monday. The safe-haven yen stabilised against the dollar, trading at 78.55 yen.
Despite hopes the ECB will soon start buying bonds to ease bond market jitters, markets were still worried by Germany’s continued opposition to any large-scale bond-buying programme while Greece is walking a tightrope over its deficit chasm, awaiting global creditors to approve bailout funds.
“For now, the disparate and ‘off the cuff’ talk from the politicians indicates that the debate on what to do is still ongoing. We don’t see the debate over Greece affecting risk sentiment much more in August. The risks for later in September and beyond remain real, however,” Societe Generale said in a research note.
In Japan, another hugely indebted country, political wrangling over an opposition demand for an early election is threatening to cloud the fate of its tax hike plan, crucial to stem the country’s ballooning budget deficit.
Oil prices fell after racing up to a 12-week high yesterday, with Brent crude futures down 0.4 per cent to $111.57 a barrel and US crude down 0.5 per cent to $93.23 a barrel.
Copper shed 0.6 per cent to $7,537 a tonne after reaching a one-week high yesterday.
A change in asset flows could benefit gold, which has been undermined by the dollar’s strength as the euro slumped.
The correlation between gold and the Australian dollar, which has consistently held above the 100-week moving average since mid-2005, suggests bullion could be set for a rebound while the Australian dollar may be peaking, some analysts said.
The key technical support level is at 1,520 this week with the cross trading at 1,527, they noted