Nikkei hit as Japan falls back into recession

[May 19, 2011]  LONDON (AP) -- Japanese stocks fell Thursday after figures showed the country's economy shrank more than anticipated in the first three months of the year, but markets elsewhere took the news in their stride to build on the previous day's gains.

Government figures showed the Japanese economy shrank by a quarterly rate of 0.9 percent in the first quarter, due to the economic dislocation caused by the devastating March 11 earthquake and tsunami. Following on from the 0.8 percent contraction in the last three months of 2010, Japan's economy is officially back in recession.

The figures were significantly worse than market expectations -- the consensus in the markets was that output would only fall by around 0.4 percent.

As a result, the Nikkei index of leading Japanese shares fell 0.4 percent to 9,680.82.

Though the Nikkei's retreat had an impact elsewhere in Asia, European markets and Wall Street futures have moved ahead amid hopes that recent days' sell-off may have run its course.

"Investors will be hoping last session's rise and the positive sentiment from Europe can boost stocks for a second consecutive day," said Yusuf Heusen, senior sales trader at IG Index.

In Europe, the FTSE 100 index of leading British shares was up 1.1 percent at 5,987 while Germany's DAX rose 1.4 percent to 7,407. The CAC-40 in France was 1.4 percent higher at 4,033.

Wall Street futures were poised for a steady opening after Wednesday's gains -- Dow futures were up 0.1 percent at 12,547 while the broader Standard & Poor's 500 futures rose an equivalent rate to 1,340.

Over the past couple of weeks, sentiment across markets has been fragile, with investors worried about a slowdown in the global economic recovery. Weekly U.S. jobless claims and a monthly economic survey from the Federal Reserve Bank of Philadelphia will be closely monitored in the context of these recent concerns.

The weekly jobless claims are expected to remain above the psychologically important 400,000 level, falling by only 10,000 to 420,000.

"It does look that U.S. activity is losing momentum into the second quarter," said Neil MacKinnon, global macro strategist at VTB Capital.

With the U.S. unemployment rate still relatively high at 9 percent, investors doubt that the U.S. Federal Reserve will be raising interest rates anytime soon. Though the minutes to the last meeting, published Wednesday, showed rate-setters discussing how to end the current super-loose policy environment there are few indications that rates will be rising in the next few months.

That's not the case in the eurozone, where the European Central Bank has already lifted borrowing costs and is expected to do so again in July. The differing policy approaches are the main reason why the euro remains relatively well-supported in the markets despite worries over Europe's debt crisis.

By late morning London time, the euro was 0.1 percent higher at $1.4278.

Elsewhere in Asia, Hong Kong's Hang Seng rose 0.7 percent to 23,163.38, while Australia's S&P/ASX 200 climbed 1.3 percent to 4,756.40.

However, South Korea's Kospi index slumped 1.9 percent to 2,095.51 while Chinese stocks fell on concerns further monetary tightening measures might squeeze liquidity, analysts said. Investors were also cautious over how surging prices might affect corporate earnings.

The benchmark Shanghai Composite Index fell 0.5 percent to 2,859.57. The Shenzhen Composite Index also lost 0.5 percent, to 1,197.31. Shares in airlines and power producers weakened.

Benchmark crude for June delivery was down 12 cents to $99.98 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $3.19, or 3.3 percent, to settle at $100.10 on Wednesday.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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