Asian shares and the euro fell to seven-week lows on Friday as European officials failed to soothe investor fears that the eurozone's debt crisis could trigger a credit crunch if funding costs run out of control.
MSCI's broadest index of Asia Pacific shares outside Japan slid 1.4 percent on Friday, hitting a seven-week low. Japan's Nikkei inched up 0.1 percent after touching a fresh two-and-a-half-year low earlier on Friday. European shares fell for the sixth consecutive session in low volume on Thursday while Wall Street was shut for the Thanksgiving holiday.
With European policymakers struggling to break out of the deadlock and no convincing progress in sight over the euro zone debt crisis, investors were shunning riskier assets and selling those normally perceived as safe to raise cash or cover losses.
Risk appetite is very low and fear factor is very high, said Markus Rosgen, head of Asia strategy at Citigroup. Basically people are fearful and whenever people are fearful, equities tend to be cheap. What people are doing is where they have profits, they are taking profits. Gold is one area where they have profits, he said, adding that volume for overall markets was low suggesting very little activity.
France and Germany agreed on Thursday to stop bickering openly about whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis. They expressed their backing for Italian Prime Minister Mario Monti in his task of overcoming the country's massive debt burden.
French President Nicolas Sarkozy also said Paris and Berlin would circulate joint proposals before a Dec. 9 European Union summit for treaty amendments to entrench tougher budget discipline in the 17-nation euro area.
But with market seeking actions rather than rhetoric, sentiment remained highly risk-averse as Germany stood firmly opposed to the creation of joint euro zone bonds or boosting the ECB's role in solving the fiscal problems of individual euro zone members.
Disappointment that officials continue to tinker with the trivial rather than consider the bold pushed risk appetites lower and increased the downside risks to the outlook for the European sovereign debt crisis, said Besa Deda, chief economist at St. George Bank in Sydney.
FUNDING WOES DEEPEN
Funding stresses for European banks escalated, with the cost of swapping euros into dollars in the currency swap market rising to fresh three-year highs of 148 basis points on Thursday.
The ECB is looking at extending the term of loans it offers banks to 2 or even 3 years to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc's economy, people familiar with the matter say.
The euro fell to a seven-week low against the dollar of $1.3314 on Friday. As a gauge of risk-taking, commodity currencies struggled, with the Australian dollar down 0.24 percent to $0.9696 and not far from a seven-week low of $0.9664 touched earlier in the week.
A day after weak demand for a German bond auction shocked global markets and fuelled fears the crisis may be hurting Europe's economic powerhouse, the closely-watched German Ifo business climate index on Thursday bucked expectations and showed a rise for November for the first time since June.
German government borrowing costs stayed elevated, with 10-year government bond yields rising as high as 2.14 percent on Thursday - the highest in nearly a month.
The premium investors' demand to hold Portuguese government bonds over German Bunds rose on Thursday after Fitch downgraded Portugal's rating to junk status.
Bearish sentiment spilled over to Asian credit markets, with spreads on the iTraxx Asia ex-Japan investment grade index widening by about five basis points on Friday.
Japanese government bonds fell, with the benchmark cash 10-year yield rising 3.5 basis points to 1.015 percent. Spot gold fell almost 0.2 percent to around $1,691 an ounce on Friday. It hit a one-month low of $1,665.88 earlier this week.