Shares, euro fall as Spain bailout fears grow - Reuters UK

By Chikako Mogi

TOKYO | Mon Jul 23, 2012 6:30am BST

TOKYO (Reuters) - Asian shares slid and the euro hovered near multi-year lows hit earlier on Monday, as Spain sparked concerns about its ability to stave off a sovereign bailout after two indebted regions sought financial assistance from the central government.

Fears the euro zone's fourth largest economy will be forced to follow Greece, Portugal and Ireland - which were thrown lifelines by international lenders after their borrowing costs shot above sustainable levels - drove the 10-year U.S. Treasury yield to a record low 1.4365 percent early in Asia.

Spain's fiscal woes triggered selling in oil, sending both Brent and U.S. crude down more than $1 at $105.43 a barrel and 90.34 a barrel respectively, while corn and soybean prices eased from record highs scaled on Friday.

European stocks were likely to extend Friday's losses, while U.S. stock futures fell 0.5 percent to point to a sluggish start in Wall Street. Financial spreadbetters called the main indexes in London, Paris and Frankfurt to open down as much as 1.5 percent.

"Like so many times over the last two-plus years, the market has been reminded of the fragility of any rally, and how European landmines are forever present and ready to detonate at any time," said Cameron Peacock, analyst at IG Markets.

MSCI's broadest index of Asia-Pacific shares outside Japan tumbled 2.2 percent, which would mark its biggest one-day drop in about two months.

Japan's Nikkei stock average slid 1.3 percent, after global equities markets were slammed on Friday when Spain's Valencia region sought financial aid from Madrid, hoisting Spanish 10-year government bond yield to a euro-era high at 7.32 percent.

More bad news emerged over the weekend from Spain when another region, Murcia, said on Sunday it would seek government financial help, while media reported half a dozen regional governments were ready to follow in the footsteps of Valencia.

The euro extended its fall against the Japanese yen, hitting its lowest since November 2000 around 94.60 yen, and slipped to a two-year low against the U.S. dollar around $1.2103. The single currency also plumbed record lows against the Australian and New Zealand currencies at A$1.1671 and NZ$1.5104 in thin early trade.

"There is nothing good from Europe and that keeps the euro under pressure, especially the first half of the week when we have euro zone data", said Yuji Saito, director of foreign exchange at Credit Agricole Bank in Tokyo, referring to consumer confidence and manufacturing reports due on Monday and Tuesday.

The euro may have more room to fall, as data up to July 17 showed speculators had increased bets against the euro and raised their bets in favour of the U.S. dollar.

The prime minister of Greece, which until last month was at the centre of the euro zone debt crisis, said it was in a "Great Depression" similar to the United States in the 1930s, two days before international lenders arrive in Athens to sort out further rescue payments to keep the debt-laden country afloat.

Asian credit markets faltered with the retreat in risk appetite, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 9 basis points.

G3 SOVEREIGN BONDS OUTPERFORM

An intensifying flight to safety over return that pushed Treasury yields down also dragged the 10-year Japanese government bond yield to a nine-year low of 0.72 percent and lifted 10-year JGB futures to nine-year highs.

Two-year bond yields have dipped into negative territory in core triple-A rated Germany and the Netherlands, which make JGB yields, despite their low levels, relatively attractive.

"The strength in G3 government bond markets is a reflection of how tense global financial markets are," said Takafumi Yamawaki, chief Japan rates strategist at JPMorgan in Tokyo.

"Investors are looking at nominal interest rates, so JGBs may be appealing for them," he said, adding that if the euro zone debt crisis deteriorates further, the 10-year JGB yield could even fall below 0.70 percent in the near-term.

As heightening contagion risks in the euro zone's three-year debt crisis dampen the global economy, a surge in grains prices was threatening to further undermine fragile growth prospects.

The worst U.S. drought in 56 years pushed soybean futures to a record high $17.77-3/4 a bushel on Friday and corn also to an all-time high of $8.28-3/4.

Soybean futures fell to $17.37 while corn also fell to $8.13 on Monday ahead of the U.S. Department of Agriculture's crop condition report due later on Monday.

"International prices would be unlikely to fall much below their current high levels because some of the damage already done to the U.S. maize crop is irreversible," said Hiroyuki Konuma, assistant director-general and regional representative at the United Nations Food and Agriculture Organization in Bangkok. "The likelihood of a repeat of excessive high prices such as those in 2007-08 cannot be ruled out" if the dry conditions kept upward pressure on grains prices, he said.

(Editing by Alex Richardson)