Asian shares fall on growth, euro zone debt worries

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Asian shares fell for a third straight day on Wednesday as investors continued to cut back their risk exposure given uncertainty over global growth prospects and resurfacing worries about debt restructuring in struggling euro zone economies.

After a sharp drop in global equities overnight, MSCI's broadest index of Asia Pacific shares outside Japan fell 0.8 per cent to a 10-week low while Japan's Nikkei average dropped as much as 1.5 per cent to its lowest level in nearly two months.

European shares hit a 10-week low on the first trading day after the four-day Easter holiday on Tuesday, and Wall Street's benchmark Standard & Poor's 500 Index .SPX followed through with a 1.71 per cent slide, its worst day in four months.

The sell-off was triggered by Friday's data which showed a sharp slowdown in U.S. jobs creation last month, along with Tuesday's data which suggested softening Chinese demand even when Beijing returned to an export-led trade surplus in March.

Worries about tepid global demand growth in the world's two largest economies hammered industrial commodities, with Shanghai copper plunging over 2 per cent to three-month lows on Wednesday, tracking sharp losses in London in the prior session.

Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong, said markets had raced ahead of themselves in recent months, with Europe's sovereign debt problems set to remain a factor for years.

"Optimism has reversed, but it's not that negativity has resumed," he said, adding that the jobs data was still consistent with expectations for the U.S. economy to grow 2 to 2.5 per cent, although recent data had exceeded expectations.

"For China, the trade data is a big indicator that business is as usual," pointing to a soft landing, Foster said.

He added that bank lending data due later this week would likely confirm an underlying trend of the financial sector supporting the overall economy.

The euro held steady around $1.3090 while the dollar rebounded from a five-week low of 80.60 yen.

Oil also recovered after suffering its biggest one-day percentage loss of the year on Tuesday, hitting a seven-week low on concerns about a potential slowdown in the economy of No. 2 crude consumer China.

Brent crude was up 0.1 per cent to $120 a barrel on Wednesday, after settling down $2.79. Tuesday's 2.27 per cent slide was the biggest one-day percentage loss since December 14. U.S. crude added 0.2 per cent to $101.22 on Wednesday, after settling at the lowest close since February 14.

Gold rose on Tuesday for a fourth straight day, its longest streak in two months, on safe-haven appeal. But bullion retreated on Wednesday, down 0.2 per cent to $1,655.89 an ounce.

RISING STRESS SIGNS
The early 2012 rally in assets that are riskier but provide the potential for higher returns has given way to choppy, two-way volatility, Standard Chartered Bank said in a research note.

"For Q2, our strategy remains defensive. US data is deteriorating, Europe is in recession and China is still slowing," it said.

Asian credit markets took a hit from growing risk aversion, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 6 basis points.

Benchmark 10-year U.S. Treasury yields fell below 2 per cent for the first time in over four weeks on Tuesday while resurfacing concerns about Europe's debt problems drove Spanish 10-year yields up to nearly 6 percent. Spanish bonds have been weighed by last week's weak debt sale.

Italian bond yields were also dragged higher ahead of a 5 billion euro bond auction on Thursday.

Rising premiums on the peripherals pushed German government bond yields lower, with the two-year yield at 0.098 per cent undershooting the two-year Japanese debt yielding around 0.1 per cent.

German bond yields are lower than Japanese yields for the first time since January 1988, according to a Merrill Lynch report.

In another sign of rising stress in markets, the VIX index rose to a five-week high on Tuesday, having jumped about 31 per cent so far in April.

The index, a key gauge of how investors perceive risk, measures expected volatility in the S&P 500 index over the next 30 days.