GLOBAL MARKETS-Shares, euro jump as EU aids Spanish banks

TOKYO: Shares, commodities and the battered euro jumped on Monday after euro zone finance ministers agreed to lend Spain up to $125 billion to shore up its struggling banks, relieving markets that had feared for the country's fiscal collapse.

The relief may be short lived though as investors look forward to Greek national elections on June 17 that could lay the path for Athens to leave the bloc and precipitate a deeper crisis over the future of the euro.

The euro rose nearly 1 percent to $1.26694 on Monday, its highest level since May 23. The Australian dollar, closely linked to risk appetite, gained as much as 0.9 percent to $1.0005, its highest rate since May 15.

Brent and U.S. crude futures both rose more than $2 and London copper futures pushed more than 2 percent higher to $7,455 a tonne.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 percent. It's rise last week followed four weeks in a row of losses.

Japan's Nikkei average added 2 percent, after sagging 2.1 percent on Friday. Still, it eked out its first gain last week for nine weeks.

The strong Asian open was preceded by U.S. stock index futures rallying more than 1 percent on Sunday, suggesting Wall Street will extend the previous week's advance, which was the S&P's best of 2012.

U.S. Treasury bond futures were down sharply in Asia on Monday, reflecting the switch out of so-called safe haven assets to riskier ones. The 30-year contract was off 1-11/32 at 147 26/32.

The 17-nation euro currency area agreed to lend Madrid up to 100 billion euros ($125 billion) for its bank rescue fund, more than an initial audit suggested it might need.

The European Union action is going to be a temporary success because the Spanish crisis is mostly centred around its banks, said Richard Hastings, macro and consumer strategist at Global Hunter Securities.

"The immediate effect on financial markets should be beneficial. Equity markets especially respond well to short-term improvements, while bond markets, especially higher-quality debt, might continue to send out signals in the form of very high prices and low yields that the trouble is not over," Hastings said.

The rescue for Spain's banks follows bailouts for Greece, Ireland and Portugal since 2010, and comes a week before a crucial election in Greece that could determine whether Athens will stay with the euro bloc.

Analysts expect investors' appetite to buy stocks, commodities and other riskier assets to remain limited by the euro zone's broader problems. Its challenge of reducing high sovereign debts and pursuing fiscal austerity, while achieving growth, will not be resolved anytime soon.

"The next phase of the Spain situation comes in six to nine more months when it becomes clear that Spain's economy has not improved, thus pointing to a wider realm of distress," Hastings said.

"That is indeed the primary concern for the entire European situation: that the relationship between banking, credit and growth remains fragmented and impaired."

MORE LIKE SHORT COVERING

Analysts said Monday's market rebound was probably more to do with short covering than a return to full risk taking, especially in the euro, given record positions built up betting on a decline in its value.

Commodity Futures Trading Commission data showed on Friday that net euro short positions increased to 214,418 contracts in the latest week from 203,415 in the previous week.

"Aid to Spanish banks suggests European policymakers want to prevent euro zone problems from causing further volatility in global financial markets and threatening the world economy, and this provides a sense of relief for investors," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"But uncertainties remain with how funds are provided to Spanish banks, as well as the outcome of Greece's election and the situation in peripherals such as Italy. I see the recovery in currencies, especially the euro, largely as an unwinding of huge short positions," he said.

EU's Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview a day after the Spanish loan agreement that while Spain's banking sector needed to be reformed as part of the deal, no new conditions would be put on the wider economy.

No precise amount was set because Spain said it needed time for an independent assessment of the capital needs of its banking sector, which is due to be delivered in less than two weeks.

Improvement in general market sentiment eased the cost of insuring against corporate and sovereign defaults in Asia, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 5 basis points. - Reuters