US debt deal weighs on Asian stocks

Asian stocks fell more than 2 per cent and gold sat near a record above $1,660 an ounce today, with fears increasing that Washington's efforts to cut spending will slow growth at a time when global factory output is already stagnating.

Completion of a last-gasp deal to avoid a US default failed to bring any relief, as investors focussed instead on how tighter fiscal policy could constrict US growth and Europe's debt crisis was still worsening.

"I think the conditions have completely changed this week," said Koichi Ono, senior strategist at Daiwa Securities Capital Markets in Tokyo. "Until last week, people have been saying the US debt ceiling was the problem. Now they talk about worries about the health of the economy."

In Europe, financial spreadbetters were calling the major share indexes to open down 1.3-1.4 per cent.

Views on the economic outlook were rapidly being revised, with JPMorgan cutting its forecast on 2012 US growth to 1 per cent and markets reflecting expectations of more than 80 basis points of rate cuts in Australia - 60 basis points more than a day ago - contributing to the Australian dollar's slide below $1.07.

US consumer spending fell in June for the first time in nearly two years and incomes barely rose, signs that the economy lacked momentum as the second quarter drew to a close, data yesterday showed.

That followed Monday's manufacturing data from the United States, Europe and China showing growth near a standstill and last week's disappointing second-quarter US GDP estimate. A series of US employment data releases from today through Friday will be closely watched.

"The market is standing on the edge of the cliff. US manufacturing activity, growth rate, employment data are all close to a critical point," said Kim Se-jung, a strategist at Shinyoung Securities in Seoul.

Japan's Nikkei share average fell 2.2 percent and MSCI's broadest index of Asia Pacific shares outside Japan fell 2.4 percent, slipping below its 200-day moving average, an indicator of the medium-term trend.

Australian shares fell 2.1 per cent and South Korean stocks dropped more than 2.5 per cent.

Asia equity markets that are particularly exposed to swings in global business cycles and commodities prices have been seeing earnings downgrades.

Taiwan, where about half of the equity market cap is in the technology sector, has been the biggest target of downward EPS revisions in Asia Pacific, according to Thomson Reuters StarMine SmartEstimates, which gives a greater weighting to the more accurate forecasters.

Analysts have in the past 30 days cut their EPS estimates for Taiwanese companies this year by an average 5.5 per cent, more than twice the next market with the biggest downgrades, Australia at 2.4 per cent, the SmartEstimates show.

On the flip side, frontier markets such as Vietnam and Pakistan as well as markets with companies that depend mostly on domestic demand, such as Indonesia, have seen upgrades of earnings forecasts.

Investors who had initially cheered a deal in Washington to raise the debt ceiling quickly realised that the spending cuts called for under the plan would place a fiscal drag on an already struggling economy.

Europe's sovereign debt crisis also contributed to the gloom - Italian bond yields hit their highest in the euro's 11-year lifetime yesterday.

Italy and Spain have been under increased pressure in recent weeks due to concerns that the euro zone's bailout fund is too small to protect larger peripheral economies if the contagion from the Greek crisis cannot be contained.

"The implications for the Italian market and economy going through something similar to Greece is pretty frightening. People are suggesting it's not bailout-able," said Justin Gallagher, head of Sydney sales trading at RBS.

The gloom sent investors scurrying towards assets seen as offering safety in times of financial turbulence.

The Swiss franc traded around 0.7670 after rocketing to a record high around 0.7610 per dollar yesterday, but commodity-linked currencies such as the Australian dollar slipped as investors shed riskier assets.

The euro lost ground against the dollar, trading around $1.4200, after falling as low as $1.4149.

"It is abundantly clear that market participants have little confidence in the success of the patchwork of solutions that have been discussed by euro zone policymakers thus far," said Samarjit Shankar, managing director of global foreign exchange strategy at BNY Mellon.

Traditional safe haven gold touched a record high at $1,661.14 an ounce, while oil, demand for which is influenced by growth expectations, slipped around 0.6 per cent.

Japanese government debt, another safe haven, was in demand, with 10-year futures rising 0.24 point to 142.16, the highest since November, while the benchmark 10-year yield slipped 2.5 basis points to 1.015 per cent.

Reuters