Soaring Spanish debt costs cap Asian shares, hurt euro

TOKYO Tue Apr 17, 2012 8:32am IST

A man looks at a stock quotation board outside a brokerage in Tokyo September 26, 2011. REUTERS/Toru Hanai/Files

A man looks at a stock quotation board outside a brokerage in Tokyo September 26, 2011.

Credit: Reuters/Toru Hanai/Files

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TOKYO (Reuters) - Asian shares were capped while the euro fell on Tuesday, as soaring Spanish borrowing costs underscored the fading impact of the European Central Bank's bond purchases and stoked investor nervousness over euro zone debt woes.

MSCI's broadest index of Asia Pacific shares outside Japan gave up small early gains to ease 0.3 percent, with Korean and Chinese shares among the underperformers.

Japan's Nikkei average edged up 0.2 percent after previous session's sharp losses while Australian shares added 0.1 percent, failing to hold above a key technical level.

"Investors are beginning to question if Spain's fiscal austerity measures could be sustainable as its economy deteriorates, while sluggish growth would push housing prices lower and raise the risk of nonperforming loans ballooning," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"The Spanish yields are rising but still well below critical levels, showing that investors are not yet convinced of a full-blown risk scenario developing."

The euro was down 0.2 percent on the day at $1.3120, after hitting a two-month low around $1.2994 on Monday.

Spanish 10-year government bond yields rose above 6 percent on Monday for the first time since the beginning of December, fuelling concerns that Madrid could fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009.

That would raise the risk of the euro zone's fourth largest economy being pushed into seeking an international bailout.

Spain, which has already completed almost half its debt issuance plans for this year, faces a fresh test of investor confidence when it sells 12- and 18-month Treasury bills later on Tuesday, ahead of more significant auctions of two- and 10-year bonds on Thursday.

If Spanish yields keep rising and pull other peripheral sovereign debt yields higher along the way, the European Central Bank will face growing pressure to resume its bond purchases after its last such step on February 29.

Spanish banks are by far are the biggest borrowers from the

ECB.

"We think the current amount of liquidity seems sufficient to cover funding needs in Italy and Spain, at least for now. That being said, the market may be asking for reassurance further out," Barclays Capital analysts said in a research note.

BUNDS RALLY

Germany's government bonds, viewed as the euro zone's safest debt, rallied strongly on Monday as Spanish yields soared and the cost of insuring Spanish debt against default hit a record high, while Italian 10-year yields remained elevated at almost 5.6 percent.

As pressure mounts for more support from authorities to calm market nervousness, a meeting of the International Monetary Fund later in the week will be a key focus for the markets. A plan to raise new resources for the global lender to contain the euro zone debt crisis tops the agenda.

Sentiment was partly bolstered by better-than-expected U.S. retail sales data released on Monday, which eased concerns about the U.S. economic slowdown.

U.S. retail sales rose 0.8 percent in March, above forecasts for a 0.3 percent increase, as Americans shrugged off high gasoline prices, indicating solid consumer spending which accounts for more than two-thirds of U.S. economic activity.

Oil futures were mixed, after a more than 2 percent drop on Monday on news that a major pipeline reversal that will alleviate a large U.S. bottleneck may start ahead of schedule.

Brent crude was down 0.4 percent to $118.27 a barrel after settling down $2.53, while U.S. crude was up 0.1 percent to $102.99.

Asian credit markets firmed slightly, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 3 basis points.

(Editing by Richard Pullin and Alex Richardson)

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