tokyo 07 09, 2012, 09:30 IST
Asian shares and the euro slumped on Monday as sluggish U.S. jobs data and cooling inflation in China deepened worries about slowing global economic growth and reinforced risk aversion ahead of a meeting aimed at defining steps to shore up Europe's banks.
The euro fell to a two-year low of $1.2225 in early Monday Asian trade, while commodity-linked currencies such as the Australian dollar and the New Zealand dollar, typically indicative of risk appetite, hit one-week lows.
"What investors are most sensitive to right now is the risk of an economic deceleration around the world," said Tetsuro Ii, president of Commons Asset Management.
The market is set to focus on China's economic slowdown in particular, with second-quarter GDP figures on Friday expected to be the worst at least three years.
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MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9 percent after rising 1.6 percent for the first week of the third quarter.
Japan's Nikkei average shed 0.8 percent while 10-year Japanese government bond futures jumped to their highest since October 2010 and the 10-year cash bond yield touched 0.790 percent to match a nine-year low hit on June 4.
"Investors are pouring money into Japanese government bonds because they no longer feel certain about piling up Bunds due to increasing pressure on Germany to bear a greater burden for the euro zone's problems," said Ii.
U.S. employers added fewer new jobs than expected in June, sending global stocks lower on Friday and lifting borrowing costs in Spain above the critical 7 percent. The data may not prompt any immediate action, but it boosted the chances of the Federal Reserve launching a new round of monetary stimulus to boost growth, a poll showed.
Slow U.S. economic growth will probably continue for quite some time as firms postpone hiring and investment in the face of an uncertain global economy, Boston Fed President Eric Rosengren said in Bangkok on Monday. He does not have a vote on the U.S. central bank's policy-setting committee this year.
China's annual consumer inflation cooled further to 2.2 percent in June, undershooting forecasts and justifying a surprise rate cut from the nation's central bank last week. The producer price index also fell more sharply than expected to 2.1 percent.
The numbers open the way for more stimulus without stoking worries about inflation.
"We think the trend of easing consumer inflation will last in the coming months, which will provide much more scope for monetary policy relaxation going forward," said Wang Jin, an analyst at Guotai Junan Securities in Shanghai.
Premier Wen Jiabao said on Sunday that China needs to make aggressive efforts to fine-tune its economic policies to support an economy still under downward pressures, suggesting Beijing will take further action to fight slowing growth.
Investors' renewed flight to safety comes after alarm about the global economy prodded a slew of monetary easing last week as well as a surprise agreement by European leaders late in June on steps to shore up the region's banks.
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After sliding more than $2 on worries about weakening demand on Friday, oil regained some ground, with U.S. crude futures up 0.6 percent at $84.93 a barrel and Brent trading 0.7 percent higher at 98.89 a barrel.
Euro zone finance chiefs will try to flesh out plans to reinforce the single currency on Monday but their talks may merely highlight the limitations of last month's deal to help indebted states and banks.
Spain, at the heart of the latest bailout talks, said it would take further austerity measures in coming days but urged euro zone leaders to quickly implement a rescue plan for the country's struggling banks.
Rising Spanish and Italian bond yields and declining German yields just a week after the European meeting indicates that investors are increasingly focusing on the implementation hurdles for the European proposals, analysts said.
"More tangible action in the form of risk sharing is needed now. Absence of more flexible and larger financial assistance is set to weigh on the periphery," Michala Marcussen, an economist at Societe Generale, said in a research note.
Asian credit markets weakened with the return of risk aversion, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 7 basis points.
(Editing by Edwina Gibbs)