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BW Businessworld

Asian Shares Fall On Unclear US Stimulus, Europe

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Commodities from oil to copper and Asian shares tumbled on Friday, while risk aversion lifted the dollar and the yen, after Federal Reserve Chairman Ben Bernanke disappointed investors looking for a clear signal of further U.S. monetary stimulus.

The reaction to Bernanke's congressional testimony, which left uncertainty over the Fed's policy decision at its June 19-20 meeting, overshadowed an initial positive reaction in global markets to a Chinese interest rate cut on Thursday.

"The weaker sentiment today reflects primarily concerns about the U.S. and Europe, because people had hoped for more quantitative easing or some form of suggestion from Bernanke to stimulate the U.S. economy yesterday but that didn't happen," said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole CIB.

He added that troubles in Spain's banking sector and uncertainty over the June 17 Greek election also helped overshadow the positive news from China.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1 per cent, after hitting a one-week high and posting its biggest one-day gain since mid-January in the previous session. The index was set to manage a 0.7 per cent gain for the week, after falling for four weeks in a row.

European shares were set to fall, with spreadbetters predicting major European markets to open down as much as 1 per cent. U.S. stock futures were down 0.6 per cent.

Japan's Nikkei average fell 2 per cent.

China's move to combat faltering growth in the world's second-largest economy, the first such cut since the global financial crisis in late 2008, underlined heightened concerns about the threat to worldwide economic growth from the euro zone's escalating debt problems.

It precedes a deluge of Chinese economic data for May due this weekend, including fixed asset investment and industrial production numbers - two of China's most crucial indicators of activity and job creation - fuelling some worries that the move signalled some grim figures.

"The rate cut should have been a positive but it comes at suspicious timing," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley. "It makes people think that really bad news is going to be unleashed this weekend."

Commodities Slide
Dimmed hopes for U.S. stimulus sent oil prices down more than $1, with U.S. crude futures touching a low of $82.59 a barrel and Brent crude hitting a low of $98.26. Copper slipped 1.8 percent to $7,364 a tonne.

As investors trimmed risk exposure and sought safety, the dollar index measured against key currencies advanced 0.5 per cent. The yen, which is also perceived as a safer currency, rose 0.5 per cent versus the dollar at 79.28 yen and jumped 0.8 per cent against the euro at 99.27.

Some analysts said the U.S. currency was likely to remain strong on euro weakness even if prospects of further monetary accommodation by the Fed increase.

"We believe that the closing of short USD positions by the private sector, driven either by a rise in risk aversion or by a shift in investment sentiment in favour of U.S. assets, will push the USD higher," said Morgan Stanley in a research note.

The euro eased 0.3 per cent to $1.2521, retreating from a two-week high of $1.2626 hit on Thursday.

The cost of insuring against corporate and sovereign defaults in Asia inched up, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 4 basis points.

Rate Cuts In Vogue
China's monetary easing followed a rate cut by the Reserve Bank of Australia on Tuesday.

Major emerging economies Brazil and India have also lowered interest rates over the past month to fend off downward risks from the euro zone's crisis, fuelling expectations central banks in developed countries would also follow suit.

But the European Central Bank kept rates steady on Wednesday and Bernanke merely said the Fed was ready to act if financial troubles mounted.

Some market players said the global trend of monetary easing to counter downside risks to growth would eventually soothe investor fears and underpin markets.

"I think the Fed is likely to act this month and is currently in the midst of making some political adjustments, while the effect of China's easing aimed at supporting its growth will gradually sink in and help resources-related assets and currencies," said Tetsuro Ii, president of Commons Asset Management.

Chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Fitch on Thursday cut Spain's credit rating by three notches to BBB and hinted at more downgrades in coming months amid expectations it may soon seek EU help for banks beset by bad debts.

Spot gold extended its slide to fall 1.3 per cent to $1,568.64 an ounce, after tumbling nearly 2 per cent on Thursday as investors unwound bets on Fed easing expectations.

"The expectations were so high for Bernanke's testimony that a lack of clear easing signal triggered programmed selling, which accelerated further when prices fell through key technical levels at $1,600 and $1,580," said Koichiro Kamei, managing director at financial research firm Market Strategy Institute.