GLOBAL MARKETS-Record Wall Street boosts sentiment, US holds key in Q2

Fri Mar 29, 2013 2:51am EDT

* MSCI Asia ex-Japan up 1.5 pct for the quarter

* Recovery trend in U.S. remains crucial for risk rally in Q2

* China, euro zone worries provide risks to downside in Q2

* Euro steady on relief over lack of panic in Cyprus

* Most Asian markets closed for Easter holidays

By Chikako Mogi

TOKYO, March 29 (Reuters) - Whether the world's largest economy can sustain momentum will be a primary focus for investors for the next three months after a general recovery trend in the United States helped risk sentiment for broad markets in the first quarter of 2013.

Asian shares edged higher and the euro steadied on Friday after banks in Cyprus reopened to relative calm. Overall trade was subdued, with many Asian markets, including Australia, Singapore and Hong Kong, closed on Friday for Easter holidays.

European and U.S. markets will also shut for Easter Friday.

The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.2 percent for a quarterly 1.5 pct gain, the worst performance in three quarters. The pan-Asian index touched a 1-1/2-year high in February.

The first quarter was marked by growing optimism about global growth, particularly with data pointing to a recovery in the U.S. economy that fed speculation the U.S. Federal Reserve might scale back its aggressive stimulus earlier than planned.

Such views spurred strong rallies in U.S. equities while underpinning the dollar, breaking the usual negative correlation between U.S. equities and the dollar.

The U.S. economy shows a seasonal tendency to weaken in the second quarter and effects of fiscal tightening may compound the bearish trend, with property regulations clouding China's growth prospects also providing potential risk.

The euro zone's financial crisis re-emerging in one form or another from time to time remains another downside risk. Worries over Chinese growth and the euro zone were not as severe as in past years, due to the brightening global growth outlook and safety nets being placed in Europe, along with the extremely accommodative monetary policy stance of major central banks.

"The basic scenario for the second quarter will be for the U.S. to maintain its economic recovery trend, which is key to sustaining hopes for improvement in global growth," said Junya Tanase, chief FX strategist at JPMorgan Chase Bank in Tokyo.

The Standard & Poor's 500 Index ended on Thursday at a record high 1,569.19, finishing the first quarter up 10 percent, slightly below a 12 percent rise at the end of the first quarter a year ago.

The fairly orderly reopening for banks in Cyprus on Thursday after the island nation received a controversial 10 billion euro bailout reduced safe-haven demand for U.S. Treasuries and gold and weighed broadly on the dollar.

The dollar measured against a basket of key currencies fell 0.4 percent to 82.921 in Asia on Friday, moving away from Wednesday's 7-1/2 month peak of 83.302. The dollar index was set for a quarterly gain of nearly 4 percent, its best quarter since end-September 2011.

Demand for the dollar, backed by hopes on rising yields, might wane because the U.S. recovery is not yet strong enough to prompt the Fed to end its aggressive easing stance.

"The dollar remains firm basically, but its outperformance is likely to wane from the very strong showing in the first quarter," Tanase said.

JAPAN IN FOCUS

The Nikkei stock average was up 0.6 percent, set for a quarterly increase of 19 percent, after touching a 4-1/2-year peak of 12,650.26 last week.

Daiwa Securities senior strategist Eiji Kinouchi said in a research note that, given the past pattern of cyclically sensitive industrial names lagging interest rate-sensitive names in New York Dow components, funds may be allocated to stocks that are sensitive to economic fundamentals. That should also be positive for Japanese stocks, he said.

Japanese equities have largely benefited from the yen's steady decline on expectations the Bank of Japan would take bold reflationary steps under its new leaders, who will hold their first policy meeting next week.

The dollar steadied around 94.06 yen, having risen about 8.4 percent for the quarter after touching a 3-1/2-year peak of 96.71 earlier in March.

The latest available data from EPFR Global released on March 22 showed Japan Equity Funds had extended their recent run to mid-March and were on track for the biggest quarterly inflow since the fourth quarter of 2005.

In contrast, China Equity Funds posted outflows for the fourth week in a row, reflecting concerns about China's property tightening and uncertainty over the economy.

Stocks in the Philippines and Indonesia hit a record high, while Thai stocks this month scaled their highest point in 19 years.

The Thomson Reuters South East Asia Index, an indicator of stocks listed in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, was set for a 5.7 percent gain for the first quarter, down from a 14.8 percent jump a year earlier.

"Southeast Asia is in overbought territory and may be vulnerable temporarily to the downside in cases of receding risk appetite, but money is expected to continue flowing into Asia over the longer term," said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo.

The euro was at $1.2822, hovering near a four-month low of $1.2750 touched on Wednesday, and was set for a quarterly loss of 2.8 percent.

Crude futures markets will be shut on Friday.

Brent's slide of near 1 percent in the quarter and U.S. crude's robust 5.9 percent rise reflected the difference in sentiment between a gloomy outlook for Europe and a U.S. economy showing signs of improving growth.

Spot gold was down 0.1 percent to $1,595.19 an ounce, set to end the first quarter down nearly 5 percent.

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