Asian shares fall again as Greek risks dominate

By Chikako Mogi

TOKYO (Reuters) - Risk assets from shares to commodities fell to multi-month lows on Tuesday as investors sought refuge from the political turmoil that is fuelling fears of Greece's exit from the euro and threatening to undo progress made so far to solve the euro zone's debt crisis.

European shares were expected to follow Asian peers lower, with financial spreadbetters predicting that major European markets would open down 0.3 percent. U.S. stock futures were up 0.3 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan retreated as much as 1.1 percent to a four-month low, before trimming some losses to be off 0.4 percent.

Materials were the worst performer, at one point plunging over 2 percent, tracking the slide in a benchmark index for resource markets which hit a 19-month low on Monday.

Weak commodities dragged down resource-reliant Australian shares while a firm yen and exporters with high exposure to Europe sent Japan's Nikkei average plummeting as much as 1.5 percent.

"The issue of Greece potentially leaving the euro zone has probably been in the minds of many, but a strengthening sense of a Chinese growth deceleration has given a new dimension to the latest risk aversion, and both factors are hitting commodities across the asset classes," said Tomomichi Akuta, senior energy researcher at Mitsubishi UFJ Research and Consulting in Tokyo.

"Doubts are growing about the sustainability of Europe's fiscal and monetary policies aimed at stabilizing the region, and risk appetite will remain guarded until a solution is found to accommodate both Greek public sentiment and Europe's desire to safeguard its unity," he said.

The U.S. benchmark Standard & Poor's 500 Index on Monday fell below a key support line at 1,340, while bank shares were hurt by JPMorgan Chase & Co which suffered trading losses that could reach $3 billion or more.

The euro slipped to a four-month low of $1.2814 and the risk-sensitive Australian dollar hit a five-month low of $0.9945.

Currencies perceived as safe haven for their relative stability, the U.S. dollar and the yen, stayed well bid, with the dollar index measured against major currencies scaling a four-month peak of 80.739.

GREECE WITHOUT GOVERNMENT

Eight days after its election, Greece still hasn't formed a government. Opponents of austerity steps, critical for the international bailout, are pushing the country towards a new vote which anti-bailout leftists are likely to win.

European leaders stuck to their stance that unless Greece fulfills its bailout commitments, they will cut off funding, which could oust Athens from the euro. That would threaten to put in disarray restructuring efforts by other highly-indebted euro zone economies which agreed to harsh fiscal reforms in return for rescue funds.

"We would argue that the issue regarding a Greek exit for the euro is not 'if' but 'when and how'. For now, policymakers are still trying to avoid ... the inevitable," said Karen Guinand, a member of the investment strategy team at private bank Lombard Odier.

"An 'orderly' exit would be the best outcome, but this will obviously be difficult to orchestrate, given the risks of contagion to other periphery countries," she said.

A strict adherence to German-led austerity policies may now have to be amended, but a pull-back in fiscal consolidation efforts will only aggravate the euro zone's debt problems.

"Ultimately, we continue to believe that debt restructuring, combined with massive bank recapitalisation, is the only feasible outcome to this crisis," Guinand said.

After the euro zone's industrial output in March fell unexpectedly, data due on Tuesday will likely show gross domestic product contracted 0.2 percent in the first quarter, falling into its second recession in just three years.

Reflecting global economic headwinds, figures on Tuesday showed China's foreign direct investment inflows dipped 2.4 percent in January-April versus last year, the longest period of drops since the depths of the global financial crisis.

Worries about China's economic growth slowing more rapidly than previously thought will likely prompt additional policy actions, which over time, will prove favourable for markets, said Morgan Stanley in a research note.

FLIGHT TO SAFE HAVEN

Broad risk aversion pressured Asian credit markets, widening the spread on the iTraxx Asia ex-Japan investment-grade index by 7 basis points, but Japanese government bonds rallied to their highest since late 2010.

Flight from riskier assets, together with a firmer dollar, sent the Thomson Reuters-Jefferies CRB index down 1.2 percent to settle below 290 points on Monday.

Oil extended losses with U.S. crude down 0.6 percent to $94.24 a barrel and Brent off 0.5 percent at $111.03.

Copper fell nearly 1 percent earlier to a low of $7,763.50, its weakest since January 12.

Spot gold touched a 4-1/2 month low below $1,550 an ounce as investors dumped bullion for cash, but lower prices spurred a flurry of activity in the physical market.