Shares gain as weak factory data boost easing hopes

TOKYO: Asian shares rose on Tuesday as manufacturing data around the world highlighted the drag on growth from the protracted euro zone debt crisis, raising expectations that major central banks will take further policy steps to support the fragile economy.

U.S. manufacturing contracted for the first time in nearly three years, while in the euro zone the jobless rate rose to a record high in May and a measure of factory activity held steady at its lowest level since June 2009. Asian factory activity was also hit by crumbling orders from abroad.

Wall Street stocks ended higher on Monday, however, as the weak U.S. data raised speculation the Federal Reserve will again step in to boost the economy. The Fed last month extended the duration a programme aimed at forcing longer-term rates down.

Many market players believe continued economic weakness will push the Fed into a third bout of quantitative easing (QE) - the policy of creating money to fund asset purchases that has lifted riskier assets such as shares and commodities in the past.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.9 percent and Japan's Nikkei average rose 0.8 percent.

"The resilience of U.S. shares ... suggests investor sentiment remained strong because they link bad data to the chance of the Fed's QE," said Kenichi Hirano, market analyst at Tachibana Securities.

Traders also expected the European Central Bank to move to bolster the region's economy by cutting its main refinancing rate by 25 basis points to 0.75 percent at its policy meeting on Thursday.

"The market is enjoying the mood right now with the ECB in all likelihood poised to follow in the same footsteps as European leaders who have taken substantial measures to address their problems and calm fears of a systemic risk," said Han Bum-ho, an analyst at Shinhan Securities.


As riskier assets such as stocks crawled higher, oil trimmed earlier losses, recovering from Monday, when prices were hit by worries about weakening demand from sluggish economic growth. U.S. crude futures were up 0.1 percent at $83.84 a barrel after earlier falling 0.4 percent, while Brent rose 0.4 percent to $97.68 a barrel after earlier easing 0.2 percent.

London copper jumped 1 percent to $7,703.25 a tonne on hopes for monetary stimulus.

The Australian dollar, which is also often viewed as a gauge of risk appetite due to its sensitivity to demand for commodities, inched up 0.2 percent to $1.0266 against the dollar. It kept its recent uptrend against the euro at A$1.2257.

The euro zone's ongoing debt crisis continues to weigh on the euro, but its impact on other currencies appears to be diluting, said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.

"The U.S. manufacturing data stood out in its surprising weakness, but it's premature to judge the economy is slumping until we see more data such as industrial output for June," he said.


The euro held steady around $1.2580, a tad above Monday's low of $1.2568 but well below Friday's high of $1.2693.

The euro fell on Monday after Finland and the Netherlands opposed a plan for the euro zone's permanent bailout fund to buy government bonds in the secondary market.

The markets' euphoria quickly faded after a surprise agreement last week by European leaders to let their rescue fund inject aid directly into stricken banks and intervene in bond markets to support highly indebted states, as markets turned to potential risks such as the insufficient size of the rescue fund and the ratification process in each member state.

"We believe further follow-through after the ECB decision will be difficult if, as we suspect, the market focus returns to the associated implementation risks," Barclays Capital analysts said in a research note.

For the euro to find a solid floor, yields on Italian and Spanish government debt must return to a clear downtrend, with the Spanish 10-year yield falling below 5.94-5.99 percent and for Italy's 10-year yields to clearly fall below 5.38 percent, Barclays' Yamamoto said.

Improvement was limited in Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing marginally by 2 basis points. - Reuters

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