Risk assets retreat on Greece bailout uncertainty

By Chikako Mogi

TOKYO (Reuters) – Shares, gold and oil fell and the euro remained pressured on Wednesday as Greece struggled to form a government two days after an election, heightening the risk that a hard-won bailout deal could be scrapped.

Radical leftist Alexis Tsipras meets the leaders of Greece’s mainstream parties on Wednesday to try to form a coalition government, an effort seen as doomed after he demanded that pledges made in exchange for an European Union/International Monetary Fund rescue package be torn up.

Officials estimate Greece could run out of money as soon as next month if it does not stick to the aid package terms, which kept the country solvent and in the single currency bloc.

A broad measure of Greek stocks (.ATG) dropped 3.6 percent to close at its lowest level in almost 20 years on Tuesday, while European shares sank to a four-month closing low.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) shed 1.1 percent to its lowest in more than three months, with energy (.MIAPJEN00PUS), materials (.MIAPJMT00PUS) and growth sensitive industrials (.MIAPJIN00PUS) leading the declines.

Resources-heavy Australian shares (.AXJO) plunged 1 percent to a three-week low.

“Market sentiment will have to be bearish while Greece’s response to the EU agreement remains unclear,” said Naohiro Niimura, a partner at Tokyo-based research and consulting firm Market Risk Advisory Co.

“Equities and energy markets, which had gained markedly since the start of the year will likely come under intensifying selling pressures as investors seek to wind down their long positions when risks rise of Greece departing from the euro and triggering a credit contraction,” he said.

Japan’s Nikkei stock average (.N225) slid 1.2 percent, weighed partly by the yen’s firmness against the dollar and the euro hitting exporters. (.T)

With Sunday’s elections in France and Greece handing victory to anti-austerity camps, concerns were mounting for a further delay in fiscal reforms seen as vital to refinancing highly indebted euro zone members.

“No one can see a way out of this situation, and unless European leaders come to an agreement at the next G8 meeting, the market is going to remain on edge,” said Fumiyuki Nakanishi, general manager of investment and research at SMBC Friend Securities. The G8 leaders will meet late next week.

SEEKING SAFE HAVENS

Investors shunned commodity-linked currencies, sending the Australian dollar down to a fresh four-month low of$1.0060 on Tuesday. The euro fell 0.3 percent at $1.2969, not far from a three-month low of $1.2955 reached on Monday.

“As long as political uncertainty continues, the Greek presence in the euro area in its current form could be seen to be at risk, in our view,” said Bank of America Merrill Lynch in a research.

Safe haven assets continued to draw strong bids.

U.S. Treasuries firmed in Asia on Wednesday, with the benchmark 10-year note yielding 1.8350 percent, compared with 1.8454 percent in late U.S. trade. U.S. yields briefly dipped below 1.82 percent on Tuesday to their lowest since early February, while benchmark German yields fell to a record low of 1.533 percent on Tuesday.

Gold, which is often seen as a safe haven, was pulled lower by the euro’s weakness given bullion’s close correlation with the single currency. It fell 0.7 percent to hit a four-month low of $1,593.04 an ounce on Wednesday.

“Gold is not benefiting from an asset allocation from the euro seen at last year’s euro zone crisis, as it is increasingly viewed as a quasi-currency, a risk asset, and has become prone to risk aversion,” Niimura at Risk Advisory said.

Oil extended losses, with Brent June crude down 0.5 percent at $112.22 a barrel, after falling to a low of $110.53 on Tuesday. U.S. June crude eased 0.4 percent at $96.60 a barrel, still off Tuesday’s low of $95.52.

“This Greece political uncertainty has the potential to derail the risk rally we have seen this year,” said Stan Shamu strategist at IG Markets.

A broad market slide dampened sentiment in Asian credit markets, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 6 basis points.

(Additional reporting by Sophie Knight in Tokyo and Miranda Maxwell in Melbourne; Editing by Alex Richardson)

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