Asia shares up, no signs of panic over U.S. debt deadlock

HONG KONG: Asian shares edged higher on Tuesday, July 26, rebounding
from Monday's fall, but the dollar slid to a record low against the
Swiss franc after a speech by U.S. President Barack Obama gave no sign a
deadlock in Washington over raising the debt limit was easing.

Short-term speculators took aim at the dollar after Obama delivered a
prime-time address to Americans, warning that a default on U.S. bond
obligations would be a "reckless and irresponsible outcome". But he gave
no indication a compromise was imminent.

So far investors have shown few signs of panic even as Republicans
and Democrats have failed to bridge their differences with just a week
to go to the Aug. 2 deadline the U.S. Treasury has set for when it may
fail to pay out on Treasuries.

The market reaction to a sudden breakdown in talks over the weekend
was limited given the threat of a technical default and a potential cut
in the United States' top-notch AAA credit rating.

But some market players were taking no chances, shifting funds into
safe-haven gold and the Swiss franc, driving both to record highs in
U.S. dollar terms. Gold was steady in early trade at $1,614.14 an ounce.

"The unfolding U.S. debt ceiling drama should add to the headwinds
for market risk sentiment, with a potential downgrade of the world's
ultimate risk-free asset - the U.S. Treasuries - fuelling more flight to
quality into gold and Swiss franc," said currency analysts at Citigroup
in a note to clients.

Portfolio managers and traders have said they believe an agreement
will be reached in Washington at the last minute, and that even a
technical default or rating downgrade may only cause short-term market
volatility rather than a full-fledged crisis.

Asian bonds, currencies and even shares have been one of the
beneficiaries from all the debt trouble in Europe and the political
gridlock in the United States, with investors viewing the region's
stronger growth and fundamentals as a relative safe-haven.

The MSCI index of Asia-Pacific shares outside Japan was up 0.8
percent and is up about 1 percent on the month and year, withstanding
the occasional bouts of volatility from the U.S. deficit debate and euro
zone debt crisis.

Gains were fairly broad, if on light trade. By sector, telecom, energy, financial and resource shares were driving the rise.

JAPAN WEATHERS STORM

Japan has also weathered the storm as its big automakers and
manufacturers have recovered more quickly than expected from the March
11 earthquake and tsunami.

Japan's Nikkei average clung to positive territory, thanks in part to
solid earnings from blue-chip companies such as Canon despite the yen's
persistent strength.

In currencies, the dollar erased gains scored against the euro the
previous day on widening Spanish and Italian bond yield spreads and hit a
six-week low against a basket of currencies.

The euro rose 0.6 percent to $1.4470 , while the dollar hit an
all-time low of 0.8006 Swiss francs . The dollar hovered near 78.00 yen
after briefly falling below that level.

The yen pushed back towards a record high hit against the dollar in
March, stirring some speculation Japanese authorities may soon intervene
to stem further gains. The dollar briefly spiked against the yen, but
traders said no intervention had been spotted.

Option markets -- where investors typically hedge themselves against
potential risks -- were also showing no signs of panic across the
dollar, S&P futures and Treasury futures.

While the closely watched VIX index of S&P implied volatility
ticked up on Monday to 19.35, it remains off peaks of 24.65 and 31.28
struck earlier this year.

Implied volatility on Treasury futures was also higher this month but historically subdued.

U.S. Treasuries slipped for a second day, with long-term Treasuries
under the most pressure from the worries about a rating downgrade.

Ten-year notes were down 4/32 in price to yield 3.017 percent, up a
basis point. Thirty-year bonds fell 5/32 to yield 4.328 percent, also
up a basis point. - Reuters