Asian shares capped, weak data support Fed stimulus hopes

By Chikako Mogi

TOKYO (Reuters) - Asian shares recovered from their lowest in about six months but were capped on Tuesday as the latest U.S. factory data kept the outlook for the U.S. Federal Reserve's stimulus programme unclear, with investors waiting for a more important jobs report later in the week.

The U.S. manufacturing sector shrank unexpectedly in May for the first contraction in six months, the Institute for Supply Management data showed, sending the dollar down but buoying U.S. stocks and keeping U.S. Treasury prices mixed on Monday.

Markets remained jittery as investors assessed the implications of the soft U.S. data that followed a series of positive reports which sparked speculation the Fed would start scaling back its aggressive bond-buying stimulus scheme.

Uncertainty stirred by the ISM added to the cautionary tone ahead of Friday's monthly nonfarm payrolls report, given that the Fed has specifically targetted employment levels in its stimulus policy.

The ISM report followed similarly sluggish manufacturing data from China and Europe to suggest an ailing world economy that still needs central bank support.

"The latest economic data from the United States and China add to growth worries, darkening the earnings outlook of listed firms," said Kim Young-june, a market analyst at SK Securities.

MSCI's broadest index of Asia-Pacific shares outside Japan were little changed after dropping to its lowest in nearly six months and falling for a fourth straight day on Monday.

Australian shares were up 0.1 percent while South Korean shares erased earlier gains to fall 0.4 percent. Hong Kong and Shanghai shares also declined.

Japanese equities continued to face high volatility, swung around by currency rates as the dollar touched a three-week low against the yen and other major currencies on Monday.

Japan's Nikkei stock average was last up 0.6 percent, having shed as much as 1.5 percent earlier to a seven-week low, after tumbling 3.7 percent the day before. The Nikkei, which had charged up to a 5-1/2-year peak less than two weeks ago for a gain of 53 percent since the end of 2012, has now lost 18 percent since then.

Against this backdrop, Prime Minister Shinzo Abe is set to unveil on Wednesday a third tranche of his "Abenomics" growth strategy, which is expected to focus on the creation of special economic zones where deregulation and tax cuts can be implemented in limited geographic areas such as big cities.

Reuters reported that the government could also include in the announcement steps urging Japan's public pension funds to increase their investment in equities and overseas.

"For a sustainable rally in the Tokyo bourse led by domestic institutional investors' buying, it is crucial for the growth strategy to include tough deregulation and tax cuts to make financial transactions in Japan attractive," said Xiao Minjie, an independent economist based in Tokyo.

"Tweaking pension funds' investment policy is a step forward but it has to be accompanied by structural changes," he said.

Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo, said implementing the third leg of Abe's growth strategy was likely to encourage trading: "Changes in pension investment have been talked about for some time in relation to Abenomics, but to have an official announcement is different as that would prompt active fund managers to start buying even if an actual implementation of changes by pension funds may not be imminent."

Saito said the dollar's recent fall against the yen took some hot air out of the rapidly building bullish bets on the dollar, and warned that markets were poised to resume yen selling with stops seen lined up between 99.70-100.50 yen and traders eyeing Abe's announcement due on Wednesday.

The dollar was up 0.1 percent to 99.60 yen, recovering from a three-week low of 98.86 set on Monday after the weak ISM. The dollar index, measured against a basket of six key currencies, was steady around 82.734, off Monday's three-week low of 82.428.

Volatility gauges underscored market nervousness. The CBOE Volatility index, which gauges expected volatility in the Standard & Poor's 500 index, hit a near seven-week high before settling down 0.12 percent on Monday.

The Nikkei's implied volatility stayed elevated compared to other markets such as Hong Kong shares.

London copper climbed for a second session on prospects for an extension of a demand-supporting U.S. bond buying programme while oil prices fell and gold was pressured by the steadying dollar.

U.S. crude futures fell 0.5 percent to $92.98 a barrel while Brent eased 0.3 percent to $101.76.

(Additional reporting by Jungyoun Park in Seoul; Editing by Eric Meijer)