Shares extend gains on stimulus hopes

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Photo: Filomena Scalise

Tokyo - Asian shares extended their gains on Monday, supported by expectations the Federal Reserve and the European Central Bank will deliver new measures to underpin their fragile economies.

MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.5 percent, after climbing 2.2 percent on Friday for its biggest daily rise in a month.

Japan's Nikkei stock average opened up 1.1 percent, after ending up nearly 1.5 percent on Friday, also its biggest daily gain in a month.

The turnaround in market sentiment from recent heavy selling was triggered last week when ECB President Mario Draghi pledged he would do whatever it takes to safeguard the single currency.

His comments raised hopes the ECB, which holds its policy meeting on Thursday, will act to ease borrowing strains for Spain and other highly indebted countries facing surging yields that threaten to derail fiscal restructuring efforts.

Investors held their risk appetite, pushing the Australian dollar as high as $1.0498 in early Asian trade on Monday. The dollar index, measured against a basket of major currencies, hovered near Friday's three-week low.

But the euro traded down 0.3 percent at $1.2297, slipping from a three-week high of $1.2390 touched on Friday. It slid to a two-year low around $1.2042 last week before Draghi's comments.

Uncertainty persisted in Europe about specific action, despite authorities speaking of the urgency to tackle Spain's fiscal woes which drove its 10-year government debt yield to euro-era highs of 7.78 percent last week, while Greece continued with its battle to convince creditors of its debt-cutting plans.

Jeff Sica, chief investment officer of Sica Wealth Management, was sceptical the optimism would be sustained.

“The problem being that central bankers do not have the ability to do 'whatever it takes' to save the euro. They only have the ability to undermine their credibility by making promises they cannot keep,” he said, adding that the euro's recent strength has been based on short covering and its short term appreciation would be temporary.

The US central bank also holds a policy meeting on Tuesday and Wednesday, with speculation rising the Fed might do more to bolster recovery, after data showed US second-quarter gross domestic product expanded at a 1.5 percent annual rate, the weakest pace of growth since the third quarter of 2011.

“It (the GDP) contained enough weakness to support the Fed's commitment to an exceptionally long period of nearly zero overnight interest rates,” said Richard Hastings, macro strategist at Global Hunter Securities.

“But the Fed's real catalyst comes from the most recent data in July, for Q3, which suggests a truly weaker story with greater risks of the US drifting towards growth rates of 0.5 percent and nearly recessionary conditions in Q1 2013,” he said.

US Treasury Secretary Timothy Geithner will travel to Germany to meet with his German counterpart and ECB head Draghi on Monday.

Euro zone leaders will cooperate with the ECB to show their commitment to the stability of the euro, and would in the next few days decide on measures to tackle surging Spanish bond yields, Eurogroup head Jean-Claude Juncker said in interviews with European newspapers.

On Greece, European policymakers are working on options that may include having the ECB and national central banks take huge losses on the value of their bond holdings, officials said. Greek political leaders have agreed on most of the austerity measures demanded by its creditors, a source close to the talks said on Sunday.

Speculators cut their bets for the euro's further decline while also reducing their bets in favour of the US dollar to the lowest in 2-1/2 months in the latest week to July 24, data showed on Friday. Their yen net longs have more than doubled while Australian dollar long jumped. - Reuters