Asia shares fall steeply on worries over Spain banks, growth

TOKYO, May 18 — Asian shares fell steeply today after more signs emerged of growing instability among Spanish banks and political turmoil in Greece, with the latest sluggish economic data from the United States adding to the list of risks for investors.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.6 per cent, after snapping a four-day losing streak yesterday. The index slid more than 3 per cent — its biggest one-day drop in six months — and hit a four-month low on Wednesday.

The index has shed about 9 per cent in May.

Japan’s Nikkei stock average opened down 1.7 per cent.

Global stocks fell for a fifth day, and the Standard & Poor’s 500 index closed at a four-month low yesterday.

US data showed manufacturing in the mid-Atlantic states unexpectedly contracted in May, and new claims for jobless benefits last week held at levels suggesting slow growth in hiring.

Concerns about growth plus Europe’s worsening financial woes have given momentum to the flight to safety, boosting the yen to multi-month highs against the dollar and the euro yesterday.

The euro inched up 0.2 per cent to 100.81 yen today, off its lowest since February 7 of 100.54 yen which it touched yesterday, while the dollar held at 79.36 yen, also above a three-month low of 79.13 yen hit yesterday.

But the euro marked a fresh four-month low of US$1.26661 early today and was expected to stay under strong selling pressure.

“Financial and asset market divergence in the euro zone is likely to make the EUR (euro) less attractive to reserve managers, in our view,” Morgan Stanley said in a research note.

“The shrinking pool of available higher-rated assets suitable for central bank reserves suggests that the EUR’s weighting in reserves is likely to be questioned,” it said.

That would imply that the motivation to buy the euro for purposes of diversification is declining, leaving the single currency increasingly vulnerable, Morgan Stanley said.

US June crude oil inched up 0.1 per cent to US$92.65 a barrel after settling at the lowest level since November 2 as the US data raised concerns over demand. Brent crude was down 0.4 per cent at US$107.10 a barrel, after sliding more than 2 per cent yesterday to settle at its lowest since December 30 on concerns over turmoil in Greece.

Reflecting mounting risk aversion, the CBOE VIX Volatility index, a gauge of investor anxiety that measures expected volatility in the Standard & Poor’s 500 index over the next 30 days, rose nearly 1 per cent to close at a five-month high of 24.49 yesterday.

High stress levels were carried over to Asian credit markets today, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 6 basis points to its widest level since mid-January.

Financial instability in Spain deepened, with Moody’s Investors Service cutting the long-term and deposit ratings of 16 Spanish banks, including Banco Santander late yesterday.

The government’s takeover of Bankia earlier this month has raised the prospect of more state bailouts for banks saddled with bad loans from a burst property bubble, lifting Spanish borrowing costs.

Also yesterday, Fitch downgraded Greece deeper into junk territory, citing the risk that the heavily indebted country might leave the euro zone.

A poll yesterday, the first conducted since talks to form a government collapsed and a new election was called for June 17, showed Greek voters are returning to the establishment parties that negotiated its bailout.

This projection offers some relief for European Union leaders who say that without the bailout, Greece would be headed for certain bankruptcy and ejection from the common currency, putting the euro zone on course for financial destruction. — Reuters


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