Tokyo: Asian shares rose on Tuesday on hopes of a compromise in the US fiscal crisis, while the euro fell after Moody’s Investors Service scrapped France’s top-notch credit rating, reminding investors of the protracted euro zone debt crisis.
Global stocks and commodities surged on Monday to recover some of last week’s sharp losses on hopes US lawmakers will reach a deal to avert $600 billion in tax increases and spending cuts due to start in January - the “fiscal cliff” that threatens to send the US economy back into recession.
Prospects that Greece will get a lifeline to stay solvent also helped boost markets, but the euro zone’s debt crisis saw Moody’s cut France’s government bond rating to Aa1 and kept its negative outlook, citing the country’s uncertain fiscal outlook and deteriorating economic prospects.
France’s downgrade sent the euro down 0.3% to $1.2777 in early Asia from $1.2810, a two-week high reached on Monday, and also pushed crosses lower such as the euro against the yen down 0.4% and the Australian dollar against the yen down 0.1%.
MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.3%. Australian shares were up 0.2% and South Korean shares opened 1% higher.
Wall Street stocks climbed almost 2%, extending a rally that began on Friday, with the Standard & Poor’s 500 Index closing above its 200-day moving average for the first time in eight sessions. Crude oil jumped almost 3%.
Japan’s Nikkei average opened up 0.5% at a fresh two-month high.
“Moody’s news is certainly not positive but market reaction seems contained,” said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo, adding that trading was getting lighter ahead of the US Thanksgiving holiday weekend.
“Given the recent market rally, the rest of the week is likely to be spent on adjusting positions before the long weekend, with any uptick giving way to profit taking,” he said.
Maeba expects the euro to remain pressured while the dollar will stay underpinned against the yen to hold above ¥81.
The dollar eased 0.1% to ¥81.34 but held near its highest since 25 April of ¥81.59 touched on Monday.
The Bank of Japan ends a two-day policy meeting on Tuesday, and is expected to refrain from taking fresh policy steps.
Euro zone finance ministers are expected to give a tentative go-ahead for the disbursement of €44 billion in emergency loans to Greece at a meeting later on Tuesday. The money will only be paid on 5 December if Greece meets all remaining conditions.
The ministers will also discuss how to reduce Greek debt and provide two extra years of external financing to help the country achieve its fiscal targets.
Tail risks remain
European equities rebounded from multi-month lows on Monday for their biggest daily gain in 10 weeks on signs of progress in US talks to avoid a budget crisis. An unexpected rise in US existing home sales for October also boosted sentiment.
Ratings agency Fitch on Monday warned that failure to reach a deal to resolve the $600 billion “fiscal cliff” of spending cuts and tax increases could trigger a recession and push the US jobless rate above 10%.
Fitch said, however, it did not expect Congress to allow the “fiscal cliff” to take place given the “far-reaching effects.” Fitch’s view largely reflected recent market optimism.
But Richard Franulovich, senior currency strategist at Westpac Securities in New York, said in a note that the positive conciliatory rhetoric over the “fiscal cliff” could easily come unstuck, while anything that is produced at the euro zone finance ministers’ meeting is likely to be piecemeal.
“Given our read of the fiscal cliff and Greek risks we remain comfortable fading strength in risk assets,” he said.
The CBOE Volatility index, a gauge for expected volatility in the S&P 500, hit a one-month low on Monday, reflecting receding risk aversion.
The dollar retreated from the two-month high of 81.455 hit on Friday against a basket of key currencies, and helped buoy dollar-denominated commodities.
US crude futures eased 0.4% to $88.94 a barrel after rising over $2 the previous day on supply concerns.
Israel bombed dozens more targets in the Gaza Strip on Monday. It said that, while it was prepared to step up its offensive by sending in troops, it preferred a diplomatic solution that would end Palestinian rocket fire. Egypt said a deal for a truce could be close. Reuters