Asian shares rise as Spain seeks bail out

Asian shares rose on Wednesday on account of Europe’s financial strains intensifying. This, following a warning from Spain that it was shut out of credit markets, fuelled hopes that policy makers will unveil fresh monetary stimulus measures.

Data showed that the Australian economy grew a surprisingly strong 1.3 percent in the first quarter and lifted the Australian dollar 1 percent to $0.9840 and pushed shares there up 0.3 percent from negative territory.

Morgan Stanley Capital International (MSCI) broadest index of Asia-Pacific shares outside Japan rose 1 percent, while Tuesday’s data showed that the US services sector improved in May underpinned Japan’s Nikkei average which climbed 1.3 percent.

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“Asian equities markets are moving on various expectations but the strongest driver is growing hopes for monetary policy stimulus to fend off contagion from Europe,” said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.

Spain sent a distress signal on Tuesday about the impact of the country’s banking crisis on government borrowing, saying Madrid was losing access to funding from markets at current rates and urged Europe to help revive its troubled banks.

However, sources said that no decisions can be made on how to help Madrid recapitalize its banks until the first phase of an independent banking audit is completed this month.

Market players are now eyeing central bank action to help support fragile global growth and stabilize markets, after finance ministers from the Group of Seven major economies held inconclusive emergency talks on the eurozone on Tuesday.

The move by the Reserve Bank of Australia on Tuesday to cut interest rates for a second month running by 25 basis points to 3.5 percent, partly due to a darkening global outlook, fed expectations that others such as South Korea, which kept rates steady at 3.25 percent for the 11th consecutive month in May, could follow suit, Daiwa Securities’ Yuihama said.

“Such expectations are prompting investors to look for bargains as valuations for Asian equities now suggest they are more than oversold to levels that reflect an extremely pessimistic scenario,” he said, taking particular note of the China Enterprises index of top Hong Kong-listed mainland firms, or H-shares.

Hopes of Policy Action

European shares managed to eke out gains on Tuesday, also on hopes of global central bank policy action to revive the economic recovery, but prospects were less than certain.

The European Central Bank (ECB) will hold its monthly rate-setting meeting later on Wednesday, and US Federal Reserve Chairman Ben Bernanke will testify before a congressional panel on Thursday.

“Bleak as the euro area outlook is, it could easily get worse after the Greek election on 17 June and there may be an argument for the ECB keeping its powder dry,” said James Nixon, chief European economist at Societe Generale.

“More substantively, we believe the ECB is increasingly concerned by the moral hazard actions. Each time it intervenes it merely eases the pressure on Europe’s political leaders.”

James Bullard, president of the St. Louis Federal Reserve Bank, and Dallas Fed President Richard Fisher on Tuesday suggested the US central bank was not preparing to ease monetary policy at a meeting later this month, saying the economic outlook had not deteriorated to the point where action was warranted.

The euro added 0.4 percent to $1.2492, off Tuesday’s one-week peak of $1.2543 but still above a near two-year trough of $1.2288 hit on Friday.

The euro was likely to be capped below $1.25, with Tuesday’s purchasing managers indexes showing the euro area’s vast private economy shrank in May at the fastest pace in nearly three years, with company order books collapsing, suggesting even Germany is no longer immune to the crisis.

Sentiment was hardly helped by Moody’s Investors Service downgrading the credit ratings of several German banks on Wednesday, citing increased risk of further shocks emanating from the eurozone debt crisis and their limited loss-absorption capacity.

The yen eased against the dollar to 78.78 after Japan on Tuesday signaled it was prepared to intervene to curb its currency. The Japanese currency even fell against the euro and traded down 0.4 percent at 98.42 yen on Wednesday.

US crude futures rose 0.7 percent to $84.87 a barrel and Brent gained 0.5 percent to $99.30 a barrel.

The cost of insuring against corporate and sovereign defaults in Asia eased on Wednesday, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 4 basis points.

Reuters