Asian shares struggled on Wednesday as signs that rising borrowing costs were affecting AAA-rated France stirred fears that even core euro zone members may not escape contagion from the region's debt crisis.
The political outlook remained unclear in struggling Italy and Greece as they attempt to push through severe austerity measures needed to get bail-out funds and win market confidence. Prime Minister designate Mario Monti was expected to unveil Italy's new government Wednesday.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> inched down 0.1 percent, while Japan's Nikkei stock average <.N225> opened up 0.1 percent Wednesday. <.T>
The euro fell 0.3 percent against the dollar to $1.3495, well below the ichimoku cloud base -- a technical indicator of support levels -- at $1.3568. A break and close below $1.3480 will pave the way for a move back to the October 4 trend low at $1.3145, traders said.
Markets are clearly expecting a circuit breaker to alleviate pressure on periphery bond yields, said David Scutt, a trader at Arab Bank Australia in Sydney. If no announcement is forthcoming in the days ahead, one suspects that situation could unravel fairly quickly.
Italian 10-year bond yields Tuesday climbed back above 7 percent, a level of funding cost seen as unsustainable for the debt-ridden country, while Spanish 10-year bond yields rose to 6.3 percent.
The trend hit France, rated triple-A, where the premium over comparable German Bunds hit euro-era highs.
Asian credit markets were cautious, with investor appetite for risk abating, as reflected in a slight widening of the spreads on the iTraxx Asia ex-Japan investment grade index by about 5 basis points.
The uncertainty over fiscal reforms in highly indebted euro zone countries has sparked heavy selling of bonds issued by these countries, prompting financial institutions to slash their bond holdings for fear of posting huge losses as prices plunged.
Some analysts said the European Central Bank could stem this negative spiral by buying large amounts of bonds without drying up liquidity from the purchases, under similar quantitative easing measures as undertaken by the U.S. and British central banks.
But the ECB has repeatedly rebuffed calls to become the lender of the last resort, saying it is up to individual governments to put their fiscal houses in order.
As policymakers stand at odds in determining details of the roadmap to resolve the debt crisis, prevent it from becoming a systemic risk and save the 17-state currency bloc, EU governments have until a summit on December 9 to offer a bolder and more convincing strategy, including visible financial backing.
The sovereign debt problems have hurt the euro zone economy, which grew just 0.2 percent in the third quarter, according to data Tuesday, lifted by France and Germany. But economists were resigned to the fact the bloc was almost certainly heading for a recession.
U.S. stocks climbed Tuesday after data showed October retail sales rose more than forecast, suggesting the world's largest economy began the fourth quarter with some vigour, helping push oil prices up to close at a 16-week high.
But Europe's FTSEurofirst 300 <.FTEU3> index slipped 0.5 percent and an index of global stocks <.MIWD00000PUS> declined 0.4 percent.
(Additional reporting by Ian Chua in Sydney)