tokyo 06 26, 2012, 11:10 IST
Asian shares fell on Tuesday as investors remained sceptical that a summit of European leaders would yield any substantive measures to solve the region's protracted debt crisis, now in its third year.
MSCI's broadest index of Asia-Pacific shares outside Japan were off 0.2 percent by early afternoon, giving up early gains, while Japan's Nikkei average fell 0.9 percent to its lowest in more than one week.
However, the limited losses in Asia were likely to encourage European players to tip toe back into the market after heavy selling the day before, with spreadbetters predicting major European markets would open up as much as 0.2 percent. U.S. stock futures were up 0.2 percent.
"Sentiment is not one-sidedly bearish, as low volatility in some local equities markets suggests relative stability, but the choppy trade reflects extreme caution before the European summit," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.
"Investors want to see what direction the summit's outcome will point to. It's very unclear what specific agreements may actually be made, there could be compromises on forward-looking measures, so investors can't be entirely pessimistic," he said.
The euro held steady around $1.2500, off a two-week low of $1.24713 hit on Monday.
The two-day summit in Brussels on June 28-29 will be the 20th time EU leaders have met to try to resolve a crisis that has spread across Europe since it began in Greece in early 2010.
A fifth euro zone country turned to Brussels for emergency funding on Monday when Cyprus announced it was seeking a lifeline for its banks and its budget, hours after Spain submitted a formal request to bail out its banks.
"With EM (emerging market) risks still subject to global/European market developments, investors will likely remain reluctant to make strong directional calls." said Barclays Capital analysts in a research note, adding that they would stay long in U.S. dollars, especially against European currencies.
SPAIN CONTAGION FEARED
Spain, which has asked Brussels for up to 100 billion euros, is likely to pay its highest short-term borrowing rates in over six months on Tuesday as it sells more short-term debt.
Moody's Investors Service late on Monday cut the long-term debt and deposit ratings for 28 Spanish banks and two issuer ratings, following a downgrade to the sovereign rating to just above junk status earlier this month.
The main driver behind the markets' pessimistic view was Germany's persistent resistance to issue common euro zone bonds to underpin the zone's single currency, after German Chancellor Angela Merkel on Monday said sharing debt liability within the 17-nation euro area would be "economically wrong and counterproductive".
Investors also were feeling jittery about how Italy, the euro zone's third-largest economy, would finance its huge public debts. Rome plans to sell zero-coupon and inflation-linked bonds on Tuesday and medium- and longer-term bonds on Thursday.
Greece remained a drag on markets, with its new government calling for the renegotiation of the terms of its 130 billion euro bailout, which is keeping the country afloat at a heavy cost to the economy.
A sluggish mood hit Asian credit markets as well, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 3 basis points.
Mounting investor risk aversion lifted the CBOE volatility index <.VIX>, which measures expected volatility in the Standard & Poor's 500 index over the next 30 days, up 12.5 percent to a one-week high on Monday.
OIL, COPPER TRIM GAINS
A lack of confidence that Europe will make big strides at the summit supported gold, keeping spot gold steady above $1,580 an ounce on Tuesday.
Oil and copper trimmed earlier gains, with U.S. crude falling 0.3 percent to $78.96 a barrel and Brent crude also falling 0.2 percent to $90.85 a barrel.
"Markets appear to be in risk-off mode, pricing in for disappointment ahead of the EU summit," ANZ analysts led by Mark Pervan said in a note.
London copper rose for a second session on Tuesday, up 0.5 percent at $7,373 a tonne, supported by promising U.S. housing data.
The prospect of improving growth in China, the world's second-largest economy, was also key to easing worries stemming from the financial turmoil in Europe.
A spokesman for the Chinese trade ministry said on Tuesday that Beijing's export growth is likely to improve for the rest of the year and the country can meet its 2012 target for 10 percent growth in trade.
