European shares slide 1%, but head for 12th month of gains

London: Asian shares recovered on Friday as global markets recovered overnight after lacklustre US data eased concerns about an early end to the Federal Reserve’s strong stimulus programme which has sharpened investor appetite for risk.

In Asia, Japan’s Nikkei had bounced 1.7 per cent at the end of its worst week in over a year.

“I still think if we look in the medium term, the momentum in equities is still intact,” said Peter Garnry, strategist at Saxo Bank. “For this momentum to stop it would require some kind of a political or market hiccup in Europe,” he added.

The US dollar climbed off a three-week low and share markets were volatile on Friday, as unexpectedly weak US economic data dampened expectations of an early scale-back of Federal Reserve stimulus.

The dollar was just off a three-week low against a basket of six key currencies although a surprise fall in German retail sales put pressure on the euro as it dipped 0.3 per cent to $1.3016.

European shares dropped as much as 1 per cent. Month-end factors and low volumes added to the data disappointment, but shares remained on course for their 12th straight month of gains having outperformed other parts of the world in recent weeks.

In the debt market, German Bund futures edged up and peripheral euro zone bonds weakened.

Inflation

Eurozone inflation ticked up to 1.4 per cent in May from 1.2 per cent in April, according to data on Friday that may dampen the chances of an ECB rate cut next week although unemployment in the currency bloc hit a new record of 12.2 per cent in April.

The latest grim Eurozone jobless figures came a day after France and Germany agreed to draw up plans to have a full-time Eurozone president, hold more frequent meetings and speed the disbursement of €6 billion in EU funds to fight youth unemployment.

Troubles also continue for those bordering the Eurozone. Lending to Britain’s businesses fell sharply in April, data from the Bank of England showed, dropping by the biggest margin so far in 2013, even as mortgage approvals edged higher.

Commodity markets remained squarely focused on the Federal Reserve’s stimulus strategy which has been supporting global markets since the start of the financial crisis.

Copper, which has fallen 9 per cent this year, was on track for its first monthly gain since January despite some profit-taking by traders, while oil dipped back below $101.75 as it bobbled along the bottom of its recent range and headed for its second week in the red.

“Given where the inventories are, given where the economies are, oil is very expensive at these levels,” said Jonathan Barratt, chief executive of BarrattBulletin, a Sydney-based commodity research firm.

Volatility

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.1 per cent after touching a six-week low of 463.31 on Thursday. With a fall of about 4 per cent so far in May, the index was set for its worst monthly performance in a year.

The CBOE Volatility index, which measures expected volatility in the Standard & Poor’s 500 index over the next 30 days, eased on Thursday from a five-week high seen on Wednesday.

Australian shares inched up 0.2 per cent after touching their lowest in nearly two months the previous session while South Korean shares opened 0.5 per cent higher.

“The market will open up in positive territory. We expect foreign buying to continue on the back of the US dollar’s weakness,” said Park Jeong-woo, a market analyst at Samsung Securities, of Seoul shares.

The Nikkei stock average opened up 1.6 per cent after tumbling over 5 per cent to a five-week low the day before as the dollar’s decline against the yen weighed on exporters.

The heightening volatility in Japanese equities and the yen had come hand-in-hand with the surge in benchmark 10-year Japanese government bond yields to a one-year high.

Bond buying

The jump in JGB yields was partly in line with rising US yields but it also underscored the risk of putting too much confidence in the BOJ’s aggressive bond buying plan alone to contain increases in Japanese yields, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute, in a research note.

“The Japanese government’s growth strategy plan due to be unveiled early next month will play a significant role in determining market trends going forward,” Kumano said.

The euro recovered the $1.30 level and reached a three-week high on Thursday, encouraged by the bigger-than-expected improvement in the European Commission’s economic confidence survey, showing a pick-up in morale in the Eurozone’s five largest economies.

US crude futures were down 0.2 per cent at $93.41 a barrel.