Asian markets shrug off savage overnight reaction to ECB policy, STI up 0.5%

Pedestrians walking past an electric stock board in Tokyo on March 10.
Pedestrians walking past an electric stock board in Tokyo on March 10. PHOTO: AFP

SYDNEY (REUTERS) - Asian shares rose on Friday (March 11), on track for weekly gains, shrugging off global losses logged after the European Central Bank eased aggressively but suggested it was running out of room to cut interest rates even if other stimulus options remained.

The muddled message sent European bond yields surging and snuffed out a nascent rally in risk sentiment overnight, leaving Asian share markets initially at a loss on how to react.

But by afternoon, most markets turned into positive territory, and US S&P 500 e-mini stock futures were up 0.6 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 pe rcent, poised to gain 0.8 per cent for the week, while Australia ended up 0.3 per cent.

Japan's Nikkei erased earlier sharp losses and ended up 0.5 per cent, though still fell 0.4 per cent over the week.

Singapore's Straits Times Index was trading up 0.46 per cent at 2,821.97 as of 2:45 pm.

Chinese shares lagged the region, weighed down by the banking sector, as Beijing's plan to allow debt-to-equity swaps by commercial lenders was viewed by some investors as being largely negative.

The blue-chip CSI300 index fell 0.6 per cent, while the Shanghai Composite Index was down 0.7 per cent in afternoon trade.

China's central bank underlined its commitment to a firm yuan by fixing the currency at the high for this year.

Markets went on a wild ride overnight after ECB chief Mario Draghi suggested there were limits to negative rate policy.

"From today's perspective and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further," proved to be the offending sentence.

Mr Draghi was quick to note that new facts could change the outlook and emphasised his willingness to adopt other radical measures, but by then the damage was done.

Euro debt markets moved instantly to price out further easing and pushed up rates across the curve.

At one point, German 10-year yields doubled from a low of 16 basis points to a peak of 32 basis points, a staggering move for a benchmark long-term bond.

The euro was enjoying the view at US$1.1175, having climbed from a trough of US$1.0820 to a peak of US$1.1217 on Thursday, a truly vicious move that would have stopped-out both bulls and bears and left everyone nursing losses.

The currency's near 4-cent trading range was the biggest since Dec 3, when ECB policy action also roiled markets.

Against the Japanese yen, the euro hit a three-week high of 126.86 yen on Friday, and was last at 126.76, up 0.2 per cent.

The US dollar bounced back after coming off hard on the yen as the risk mood darkened. It was last up 0.2 per cent at 113.44 yen, though still below Thursday's pre-ECB peak of 114.45.

Against a basket of currencies the dollar added about 0.1 per cent to 96.210, but it was still down 1.2 per cent for the week, having shed 1 percent on Thursday.

Many analysts considered the market reaction rather perverse given the ECB's actual steps were very aggressive.

As well as cutting all its main rates, the bank lifted its asset buying program by 20 billion euro a month and, in a bombshell, expanded the assets to include non-bank corporate debt.

"The package of measures that was announced was more than the market had been anticipating," said Peter Dragicevich, senior currency and rates strategist at Commonwealth Bank. "Based on the earlier forward guidance, and past experience, there still looks to be some scope on the part of the ECB to cut interest rates further," he added.

"The emphasis is now shifting more towards 'unconventional tools' with credit a key part of the story."

In commodity markets, the drop in the dollar was a fillip to gold which made a 13-month top at US$1,282.51 an ounce on Friday. It was last up 0.2 per cent at US$1,274.40, on track to gain 1 percent for the week.

Oil prices also edged higher after dropping on Thursday, extending the recent run of see-saw trading.

Brent added 1.7 per cent to US$40.73 a barrel, while US crude gained 2.2 per cent to US$38.67.