Stock market rallies lose steam

Wed, Sep 26, 2012, 01:00

Asian shares and commodities fell today as protests in Spain underscored the country's financing challenges and investors refocused on slowing global growth as rallies, fed by major central bank easing measures, faded.

Flows were also driven by accounting calendar adjustments, with this week seeing the month-end, the end of the July-September quarter, and in Japan, the fiscal first half.

The MSCI index of Asia-Pacific shares outside Japan slid 0.8 per cent to its lowest since September 14,th giving back nearly all the gains made after markets across riskier assets cheered the US.Federal Reserve's aggressive new stimulus aimed at job creation in the US economy.

The European Central Bank said earlier this month it would buy the bonds of struggling euro zone states if they requested aid, while the Bank of Japan followed the US Federal Reserve example by increasing bond buying to help support the economy.

But market rallies have quickly been overtaken by concerns about deteriorating world economies.

The index's materials sector led the declines with a 1.6 per cent drop. US crude fell 0.2 per cent to $91.13 a barrel and Brent down 0.3 per cent to $110.07. London copper shed 0.5 per cent to $8,237.75 a tonne.

Australian shares fell 0.4 per cent, as concerns over the global economic recovery dampened China's demand for industrial metals, a major export sector for Australia.

"The reason that these packages have to be pursued is because the underlying level of industrial production and economic growth is very weak," said Ben Lyons, an investment analyst at ATI Asset Management.

China's central bank said yesterday it will "fine tune" policy to cushion the economy against global risks while closely watching the possible impact from global policy loosening.

China cut interest rates twice in June and July and lowered banks' reserve requirement ratio three times since late 2011, but has refrained from cutting interest rates or RRR since July.

Tokyo's Nikkei average slipped 1.7 per cent to a two-week low, as a mass of stocks passed the deadline for buyers to gain rights to first-half dividends.

The falls follow an easing in global stocks and a drop in the euro to a near two-week low of $1.2886 yesterday. The CBOE Volatility index, a gauge of expected volatility in the Standard & Poor's 500 index, hit its highest in about two weeks yesterday, reflecting rising investor caution.

A further drop in Japanese stocks could fuel speculation about yen-weakening intervention by Japanese authorities to help shore up first-half book closing, keeping traders wary of testing the dollar's downside against the yen, said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

"Selling and buying forces both lack strong momentum, but the market is biased towards selling, with the euro capped by its own problems and the dollar top-heavy against the yen," he said.

The euro could slip briefly below 100 yen while heavy bids placed at 77.50 yen against the dollar may spur a blip above 78 yen, Mr Saito said.

The yen traded at 77.72 yen, near a one-week high of 77.655 hit on Tuesday, and was at 100.30 against the euro. The euro steadied at $1.2905, but stayed pressured.

Protests flared up in Spain yesterday ahead of the planned announcement of a new round of unpopular austerity measures for the 2013 budget tomorrow. Spain will also likely set a fresh timetable for economic reforms later this week.

Markets are closely watching Madrid's ability to control its finances, with ballooning regional debts crippling the government's refinancing efforts. The country is also subject to a ratings review by Moody's Investors Service.

Prime minister Mariano Rajoy is holding back from seeking a sovereign bailout, which would set the stage for the ECB to start buying high-yielding Spanish bonds to ease the country's borrowing strains.

European news and economic data may provide daily trading incentives but markets will largely stick to recent ranges as investors are unwilling to bet on direction until the US presidential election on November 6th, said Goro Ohwada, president and CEO at Japan-based fund of hedge funds, Aino Investment Corp.

"Unless it becomes clear which camp is going to win, and unless there is a significantly bad news, nobody's going to take the risk of hastily bailing out of markets. Rather, they are trying to bring their positions close to neutral so they can move quickly after the election result," he said.

Asian credit markets weakened along with other markets, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 6 basis points.


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