By Chikako Mogi
TOKYO (Reuters) – Asian shares fell more than 3 percent, the biggest one-day drop in six months, and the dollar rose broadly on Wednesday after efforts to form a new government in Greece collapsed, fuelling fears that a second election in June could precipitate Athens’ exit from the euro zone and deepen the bloc’s debt crisis.
European shares were expected to extend losses as well, with financial spreadbetters predicting that major European markets (.FTSE) (.FCHI) (.GDAXI) would open down as much as 1 percent. U.S. stock futures were down 0.2 percent. (.EU) (.L) (.N)
Investors continued to reduce positions in riskier assets, leading to a fall of more than $1 in oil prices and a drop to a 4-month low for spot gold, while lifting the dollar which tends to be seen as safe haven in times of heightened uncertainty.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS extended losses for the fourth consecutive day, sliding 3.3 percent to a new 4-month low, and was set for its biggest one-day loss since November last year. The index has fallen more than 9 percent since May 2.
“It’s part of the risk-on, risk-off trade that we’ve had for the past two years and we are still stuck in it, looking for the next catalyst,” said Andrew Pease, Sydney-based chief investment strategist at Russell Investments Asia Pacific, adding that markets may be risking becoming too pessimistic again.
“The U.S. isn’t great but doing OK, Europe is still in a mess and markets have been downgrading their views on China, and all these are feeding into an extended risk off period after a strong risk-on March quarter. As an asset manager, it’s not a time to have a strongly-held views right now,” Pease said.
The materials .MIAPJMT00PUS and energy .MIAPJEN00PUS sectors were among the biggest decliners in MSCI’s pan-Asian index, hitting resources-heavy Australian shares (.AXJO) which slipped 2.3 percent.
But the technology sector .MIAPJIT00PUS was the biggest loser and pulled South Korean (.KS11) shares down to a 4-month low, after traders cited a report that Apple Inc (AAPL.O) could be shifting orders for memory chips to Japan.
In addition to Greek jitters, financials pulled Hong Kong shares (.HSI) down more than 2.5 percent to a four-month low after a mainland newspaper reported flat loan growth for the first two weeks of May by the country’s “Big Four” state-owned banks, adding to concerns about an economic slowdown following weak data last week.
Japan’s Nikkei average (.N225) fell to a four-month low, closing down 1.1 percent. (.T)
Further depressing commodities were comments from BHP Billiton (BHP.AX) (BLT.L), the world’s biggest miner, giving a bleak outlook for the asset class.
“The tail winds of high commodity prices have contributed to record growth in the sector,” Chairman Jacques Nasser said in a speech to a business lunch in Sydney. “Now we have a period where those tail winds are moderating and we expect further easing over time.”
Greek political leaders meet on Wednesday to establish a caretaker government that will lead the country into its second election in just over a month.
Financial markets have been roiled by the prospect that a victory by leftists opposed to harsh austerity measures that are a condition of an international bailout could put both Greece’s euro membership and the euro zone’s fiscal consolidation efforts at stake.
A Greek exit from the euro may be manageable given the relatively small size of its economy, but a far more significant issue is the potential knock-on impact on unpopular restructuring policies agreed by other struggling economies such as Italy and Spain, where bond yields were climbing higher.
“The direct costs of a Greek euro exit would be huge for Greece, but manageable for the rest of the euro area. Our concern is contagion,” said Michala Marcussen at Societe Generale.
“A speedy and forceful response would be required to stem this … It’s a question of political will.”
The euro touched a four-month low below $1.27 and the Australian dollar, closely linked to expected commodities demand, hit a 5-month low of $0.9905. The dollar index (.DXY=), measured against a basket of major currencies, rose to a four-month high of 81.455.
Spot gold fell to a 4-1/2 month low of $1,532.09 an ounce, weighed by the sluggish euro and investors seeking to cash in. A stronger dollar tends to curb demand for dollar-denominated gold.
“Everybody is rushing to buy the U.S. dollar,” said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, adding that demand from jewelers was limited due to volatile prices.
Risk aversion further undermined Asian credit markets, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 9 basis points.
Two-year Japanese government bond yields fell to a 7-year low below 0.10 percent on Wednesday on growing concerns that Greece might eventually exit the euro zone.
“To arrest market fears, proactive measures are needed,” said Barclays Capital in a research note. “Unfortunately, they seem nowhere in sight. This suggests that risky assets are likely to trade erratically at best, with a bias to underperform.”
Oil fell on Wednesday, with U.S. June crude sliding 1.4 percent to $92.69 a barrel, while Brent fell 1 percent to $111.16 a barrel.
Later in the session, the U.S. Federal Reserve’s minutes of its April meeting will be released to possibly offer insight into the probability of a further quantitative easing.
(Additional reporting by Lewa Pardomuan in Singapore, Vikram Subhedar and Clement Tan in Hong Kong and James Regan and Narayanan Somasundaram in Sydney; Editing by Alex Richardson)