GLOBAL MARKETS-Cyprus jitters keep euro, Asian stocks on edge

Wed Mar 20, 2013 2:34am EDT

* Cyprus rejects bailout terms; last minute deal hopes still alive

* MSCI Asia ex-Japan share index hits 2013 low before steadying

* Hong Kong stocks outperform, led by a rally in China shares

* Fed meeting outcome also in focus

* Japanese markets closed for holiday

By Ian Chua

SYDNEY, March 20 (Reuters) - Share markets across most of Asia and the euro struggled on Wednesday after a bailout plan for Cyprus fell into disarray, but losses were limited as investors clung to hopes that a last minute deal will be hammered out.

Cyprus's parliament overwhelmingly rejected a proposed tax on bank deposits as a condition for aid, pushing the Mediterranean island a step closer to the brink of financial meltdown.

But the European Central Bank (ECB) offered some comfort by saying it was committed to providing liquidity within certain limits, even after having threatened to end emergency lending assistance for teetering Cypriot banks.

"It is relatively calm for now, but headline risks remain acute," said Sue Trinh, strategist at RBC in Hong Kong.

"Clearly the 'no' vote was not an ideal situation. The government now has to scramble for last minute options and it remains uncertain how exactly it will unfold."

The finance minister of Cyprus is in Moscow to scout for support amid speculation Russia could step up, while newly elected President Nicos Anastasiades is due to meet party leaders on Wednesday to explore a way forward.

The MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.2 percent, having earlier carved out a fresh 2013 trough. The index is now around 3 percent lower from this year's peak set a month ago.

Among the biggest losers, South Korea's KOSPI fell 1.0 percent, Australia's S&P/ASX 200 index shed 0.4 percent and Taiwan's TAIEX lost 0.5 percent. India's BSE index was down 0.4 percent.

Bucking the region's weakness, Hong Kong stocks bounced off a three-month low thanks to a rally in Chinese shares as more clarity about recently announced property curbs at home eased investor uncertainty.

Japanese financial markets were shut for a holiday.

The lacklustre performance in Asia mirrored Wall Street, and was unlikely to inspire European bourses.

Jonathan Sudaria, a dealer at Capital Spreads in London, suspects European equity markets will open flat with traders preferring to sit on the sidelines for now.

"Markets are set to open in a state of stasis as traders wait for a raft of news releases to be announced before deciding on the next leg higher or lower," he said in a note.

Commodity markets were also calmer with Brent crude recovering from a three-month low and copper off a seven-month trough. Spot gold, meanwhile, held near a three-week high.

EURO SULKS

Uncertainty surrounding Cyprus kept the euro pinned near four-month lows against the U.S. dollar. The euro fetched $1.2876, having fallen as far as $1.2844 overnight.

The common currency lost ground against the yen as well, shedding 0.2 percent to 122.39, near a two-week low of 121.45 plumbed Monday.

Yen bulls, however, will be wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday.

Expectations that Kuroda will quickly embark on a much more aggressive monetary policy to fight deflation have recently pushed the yen to multi-year lows versus the euro and dollar.

The dollar index, which tracks the greenback's performance against a basket of currencies, was flat at 82.979 hovering not far from a seven-month peak of 83.166 set a few days ago.

Investors will also keep an eye on the outcome of the Federal Reserve's two-day policy meeting due to end later on Wednesday.

Analysts expect the Fed to keep buying $85 billion a month in mortgage and Treasury bonds to encourage investment and bolster a weak economic recovery.

"Overall, we expect the Fed to maintain its stance on asset purchases and forward guidance. At the press conference, we expect the chairman to continue to downplay the costs of asset purchases while highlighting the benefits," analysts at Barclays Capital wrote in a client note.

"With the Fed having shifted to unemployment rate-based guidance, the chairman's views on the overall labour market conditions, which take into account a broader set of indicators, would be parsed."