Asian shares, euro recover on Greek debt hope

Asian shares and the euro recovered earlier losses on Tuesday after Greek Prime Minister Lucas Papademos raised hopes for a deal to be reached this week to avoid a default, but markets were starting to worry that Portugal might need a second rescue.

MSCI's broadest index of Asia-Pacific shares outside Japan opened lower, but had later climbed 0.6% and looked set for a monthly gain of nearly 10% after falling in the prior two months.

The Nikkei average also reversed course and inched up 0.2%.

Asian equities were supported for most of January as central banks worldwide took aggressive liquidity pumping steps to ease concerns over a credit crunch in Europe, while data painted a less pessimistic view on the US and German economies.

Their rally has exposed the markets to the risk of consolidation, while weaker industrial output data from South Korea reflected the Asian region was feeling the pinch from the euro zone debt crisis dampening global demand.

Talks on a debt swap deal between the Greek government and private bond holders have been slow, but Papademos said negotiators had made "significant progress", with the aim of having a definitive agreement by the end of this week.

"After the rally, most Asian assets are undergoing some kind of consolidation, but there is still hope for some kind of an agreement reached and investors are delaying expectations about this talk," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

The Korean data underlined worries about the negative impact on growth from the austerity measures Europe is pursuing in its efforts to resolve the debt crisis, she said.

Euro vulnerable technically

At a summit meeting on Monday, European leaders agreed on a permanent rescue fund for the euro zone and most endorsed a German-inspired stricter budget discipline, but they fell short of reconciling fiscal austerity with growth.

The euro was up 0.1% at $1.3159 but capped below a 6-1/2-week high of $1.3235. The dollar hovered near a record low against the yen, standing at 76.30 yen, just above an all-time low around 75.31 plumbed on October 31.

The technical outlook for the euro was bearish, as suggested by the one-month option volatility in euro/dollar and the failure of the Standard & Poor's 500 Index to break above its 8-month resistance, said Ashraf Laidi, chief global strategist at retail trading services provider City Index Group, in a note.

He expects the euro to fall below $1.25 towards the end of March and only a rise above $1.35 would change his view.

"Even if the Greece secures a Private Sector Initiative deal and meets its 14.5 billion euro payment on March 20, the fiscal and growth objectives of the austerity efforts in Athens and Rome have yet to be mulled by IMF monitors, not to mention the liquidity difficulties encountered by Portuguese sovereign bonds," he said.

The yield on 10-year Portuguese government bonds rose to more than 17%, the highest level since the launch of the euro, stoking fears that Lisbon may become the next Athens in needing a second bailout to avoid chaotic bankruptcy.

But Italy, which only recently faced a fierce market attack on a lack of confidence in its refinancing ability, saw its longer-term borrowing costs fall to just above 6% on Monday, their lowest since October.

"Portugal's spread widened but it didn't really spread to other peripherals, so things are still quite contained," said Credit Agricole CIB's Cheung.

Foreign investors are still largely reluctant to take up longer-term Italian bonds, but the country's banks have stepped up purchases of domestic debt largely thanks to the European Central Bank's disbursement of cheap, three-year loans.

Asian credit markets weakened slightly, with spreads on the iTraxx Asia ex-Japan investment grade index widening by around 2 basis points on Tuesday.