Asian shares fell for a fourth day in a row on Friday as Europe's funding difficulties intensified, with Spanish borrowing costs hitting an unsustainable level and premiums for dollar funds rising further.
In a sign that global funding strains may spread to Asia, benchmark three-month euroyen interest rates futures fell to an eight-month low on Friday on concerns that tightness in dollar money markets may prompt non-Japanese banks to raise yen at a higher rate.
Worries over the European debt crisis prompted investors to shed riskier commodities, extending their slide from Thursday when prices took their steepest tumble since September.
MSCI's broadest index of Asia Pacific shares outside Japan slid 2.2% with the materials sector leading the decline, as a slide in commodities prices hit the stock market in resource-dependant Australia.
The index, which fell the past two weeks, was set for its biggest weekly loss in about two months. It was down about 4.3% for the week and about 17% this year.
Japan's Nikkei stock average fell 1.2% and also headed for a third weekly loss. It is down about 18% so far in 2011.
European shares were likely to fall, with spreadbetters expecting London's FTSE, Frankfurt's DAX and Paris' CAC 40 to drop 1.2 to 1.3%.
New Italian Prime Minister Mario Monti on Thursday pledged his country would embark on radical fiscal reforms to pull itself out of the debt crisis. But investor jitters remained firmly in place as euro zone governments struggle to raise funds and banks refrain from lending, seizing up market liquidity.
Euro/dollar three-month cross-currency basis swaps, the cost of swapping euros for dollars, widened to -136 basis points on Thursday, the most since the 2008 financial crisis.
RISK AVERSION
U.S. stocks fell on Thursday, as fears over euro zone debt woes overtook more encouraging signs for the U.S. economy after data showed new claims for jobless benefits hit a seven-month low last week and permits for future home construction recovered in October.
The dollar index hovered near a six-week high of 78.467 hit on Thursday, while the euro stayed above five-week lows of $1.3421 touched on Thursday, with European banks seen repatriating funds as signs of funding stress grew.
But commodities currencies fell, with the Australian dollar piercing through parity.
Copper eased 1.2% earlier on Friday. Silver slipped more than 2% to a one-month low, following a 7% slump the day before.
Risk aversion dampened sentiment in Asian credit markets, with the spreads on the iTraxx Asia ex-Japan investment grade index widening by 5 basis points on Friday.
Investor commitment to a crucial bailout fund, the European Financial Stability Facility (EFSF), is conditional on improved market sentiment which can only be obtained through troubled countries such as Italy and Greece demonstrating progress in their fiscal reforms.
Euro zone policymakers are aiming to boost the firepower of the EFSF and are working to finalise the legal and technical details on Nov. 29 and to have the leveraged EFSF ready for operation before Christmas.
The yield premium of Spanish 10-year government bonds over German Bunds hit its highest euro-era level above 500 basis points after Spain paid an average yield of 6.975% on Thursday to sell its bonds, the highest rate since 1997 and just shy of the 7% level seen as unsustainable.
Spain faces a parliamentary election on Sunday, putting the country under pressure to quickly reassure markets.
