Asian shares, oil retreat as Saudi plays down output cuts

March 4, 2016 | 03:13 pm GMT+7

TOKYO/SINGAPORE - Asian shares fell on Wednesday as oil prices skidded after Saudi Arabia effectively ruled out production cuts by major producers anytime soon, sending investors into safe-havens such as the yen and gold.

European markets set to follow Asia's lead, with financial spreadbetters expecting Britain's FTSE 100 and Germany's DAX to open about 0.5 percent lower each and France's CAC 40 down about 0.7 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan extended earlier losses to fall 1.4 percent as of 0623 GMT, slipping further from Monday's six-week high.

Japan's Nikkei closed down 0.9 percent at its lowest level in a week on the drop in oil prices and as the stronger yen weighed on exporters. Australian and South Korean shares also closed lower, down 2.1 percent and 0.1 percent respectively.

Chinese shares however reversed earlier losses, with the CSI 300 index rising 0.4 percent and the Shanghai Composite up 0.6 percent.

In the United States, the S&P 500 Index fell 1.25 percent on Tuesday to 1,921.27, having failed to rise above its peak hit on Feb. 1, with energy and material sectors being a major drag on oil's quick unravelling of Monday's hefty gains.

Saudi Oil Minister Ali Al-Naimi told oil executives on Tuesday that markets should not view the agreement by four major oil producers to freeze output at January levels as a prelude to production cuts.

While Naimi said he was confident more nations would join the pact, Iran was seen as unlikely to agree to the output cap because it won't allow the country to regain the market share it lost during sanctions.

Oil prices slid, extending losses of more than 5 percent overnight. U.S. crude futures were down 2.2 percent at $31.18 per barrel, while international benchmark Brent futures were down 1.4 percent at $32.82.

"I suspect few people were expecting a deal to cut production so his comments are hardly a surprise. Yet, the latest development seems to suggest that for oil producers to get more united they will have to feel more pain," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.

The toll from low oil prices is also spreading to banks that have exposure to the energy sector, as roughly a third of U.S. shale oil producers are at high risk of slipping into bankruptcy this year, according to a study by Deloitte.

JP Morgan, the largest U.S. bank by assets, said it will increase provisions for expected losses on energy loans by $500 million, or more than 60 percent of its existing reserves.

JPMorgan shares fell 4.2 percent on the announcement.

Investors instead favoured safer assets such as U.S. Treasuries, with the 10-year notes yield falling to a two-week low of 1.714 percent overnight.

The increased risk aversion led gold to erase all its losses from earlier this week to trade at $1,225.95 per ounce, edging closer its one-year high of $1,262.90 touched about two weeks ago.

In the currency market, traditional safe-haven currencies such as the yen and the Swiss franc outperformed.

The yen firmed to 111.84 to the dollar, creeping closer to its 15-month high of 110.985 hit on Feb. 11.

The Swiss franc gained broadly, hitting a one-month high on the euro at 1.09165 franc per euro on Tuesday. It has since weakened to 1.0939 franc per euro.

The franc got a lift also when the head of its central bank warned it could not "endlessly" take further steps to ease monetary conditions.

The euro in contrast was hit by a key index on German business climate showing sentiment among German manufacturers plunged by its largest amount since the bankruptcy of Lehman Brothers in 2008.

Against the dollar, the euro fell to a three-week low of $1.0990 on Tuesday, but has since recovered to $1.10130.

The British pound remained on the defensive, hitting a seven-year low of 1.3973 on Wednesday on worries Britons would vote to leave the European Union in a June referendum. – Reuters