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Shares rebound on hopes for U.S. stimulus, new Europe steps

Published: July 26, 2012 | 6:30 am
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Asian shares rose on Thursday on bargain hunting as hopes grew for more U.S. stimulus to support growth and new European measures to contain the euro zone’s debt woes, but sentiment remained frail.

European stocks will likely open narrowly mixed, reflecting Asia’s cautiously positive mood and nearly flat U.S. stock futures which signals a mild start on Wall Street.

Financial spreadbetters called the main indexes in London .FTSE, Paris .FHCI and Frankfurt .GDAXI to open between a 0.1 percent fall and a 0.1 percent rise. .EU .L .N

Worries about the euro crisis eased somewhat on comments from European Central Bank Governing Council member Ewald Nowotny who said there are arguments for giving Europe’s permanent rescue fund a banking license — an idea that the ECB has rejected so far. A banking license would boost the fund’s firepower by allowing it access to cheap ECB funding.

Borrowing costs in Spain, which is facing snowballing regional debts and a banking sector struggling to clean up bad loans, retreated slightly on Wednesday while safe-haven U.S. Treasury yields also inched up from historic lows.

Risk assets plummeted over the past week as concerns intensified that Spain, the euro zone’s fourth-largest economy, might need to seek a full bailout. If it did, that would threaten to deplete Europe’s rescue fund just when other highly indebted states were fighting to fend off surging borrowing costs.

“The slight pull-back in euro zone borrowing costs fed some relief, giving investors an impetus to hunt for cheapened stocks as Asian equities have been oversold in terms of valuations,” said Hirokazu Yuihama, a senior strategist at Daiwa Securities.

“Caution will prevail as long as the European woes simmer and defensive sectors such as telecommunication and consumer goods will outperform growth-sensitive sectors,” he said.

According to Yuihama, however, Asia should be more attractive than elsewhere for investors as the region’s “relative cheapness has been widening since around May.”

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS, which fell the last four sessions, was up 0.6 percent at 401.95. The index hit a one-month low of 397.44 on Wednesday, but despite daily swings, its downside has been recovering from 2012 lows of 379.17 hit in early June.

Korean shares .KS11 rebounded from lows for the year hit on Wednesday, climbing 0.8 percent, while Shanghai shares also managed a 0.3 percent gain .SSEC after closing at their lowest since March 2009 on Wednesday. Japan’s Nikkei .N225 gained 0.8 percent after touching a seven-week low on Wednesday. .T

Data showing new U.S. home sales in June posted their biggest drop in more than a year and prices resumed their downward trend reinforced views the U.S. Federal Reserve would consider more easing steps to underpin a delicate recovery.

“It feels as though risk assets will probably have reasonable support, given central bankers may be warming to further action, and this leads us into next week where the FOMC and ECB meet,” said Chris Weston, a dealer at IG Markets in Melbourne.

SCEPTICISM PRESSURES EURO

The euro eased 0.1 percent to $1.2147 after rising against the dollar for the first time in six days on Wednesday.

It was off a 25-month low of $1.2042 hit on Tuesday but also below a peak on Wednesday of $1.21705. Against the yen, the euro firmed to 94.98 yen, inching away from a low of 94.12 yen touched on Tuesday, its weakest since November 2000.

The dollar held steady against the yen above 78 yen.

“The fact is the ECB is still quite divided on the issue of giving the ESM a banking license,” said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong, referring to the euro zone’s rescue fund.

“I think if anything, any bounce that this has induced would be short-lived. I don’t see the euro sustaining gains,” he said.

At the same time, the euro’s downside against the dollar may be limited ahead of the Fed’s meeting next week, given growing speculation that the Fed might take some action next week, Kotecha said.

Data released on Wednesday underscored the damage the three-year debt crisis has inflicted on Europe’s economic activity.

German business sentiment dropped in July for a third straight month to its lowest level in more than two years, according to the latest survey by the Munich-based Ifo think tank, while British economic output shrank much more than expected in the second quarter, official data showed.

The top 10 U.S. prime money market funds reduced their euro zone debt holdings to 8 percent of their combined assets in June, the lowest level since 2006 as concerns over Spain intensified, Fitch Ratings said in a report on Wednesday.

A general easing in risk aversion helped to improve Asian credit markets, narrowing the spread on the iTraxx Asia ex-Japan investment-grade index by 2 basis points.

reuters

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