Asian shares creep up, nonfarm payrolls in focus

By Chikako Mogi

TOKYO (Reuters) - Asian shares recovered from their lowest in about six months on Tuesday but investors cautiously awaited a key U.S. jobs report later in the week as the latest U.S. factory data blurred the outlook for the U.S. Federal Reserve's stimulus programme.

European stock markets are expected to rise on the back of firm overnight U.S. stocks, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open up as much as 0.5 percent. A 0.1 percent drop in U.S. stock futures, however, suggested a subdued Wall Street start.

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 U.S. manufacturing data 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.

Similarly sluggish manufacturing data from China and Europe suggested an ailing world economy still needed 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 rose 0.3 percent to break a four-day losing streak, after hitting its lowest in nearly six months on Monday.

Australian shares were up 0.3 percent while the Australian dollar was down 0.5 percent at $0.9722 after the Reserve Bank of Australia left interest rates unchanged as expected, but noted some scope for further easing.

Chinese shares were the biggest drag on regional bourses, with Shanghai shares shedding over 1 percent and pushing Hong Kong shares down 0.1 percent, after official media reported that applications by brokerages to start mutual funds appeared to have stalled. Jitters over possible tightening also weighed on sentiment.

London copper climbed for a second session, rising 0.2 percent to $7,355 a tone on prospects for an extension of a demand-supporting U.S. bond buying programme, while the steadying dollar weighed on gold.

U.S. crude futures fell 0.4 percent to $93.05 a barrel while Brent eased 0.2 percent to $101.82.

"Oil will remain unstable because of speculation over the Fed's quantitative easing," said Yusuke Seta, a commodity sales manager at Newedge Japan.

NIKKEI'S HIGH VOLATILITY

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 1.7 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 15 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 boost 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 eyes on Abe's announcement.

The dollar rose 0.3 percent to 99.81 yen, recovering from a three-week low of 98.86 set on Monday, while the dollar index, measured against a basket of six key currencies, was steady around 82.758, 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.

(Additional reporting by Jungyoun Park in Seoul and Manash Goswami in Singapore; Editing by Eric Meijer)