Credit fears grip Asian stocks

[NinjaTurtle]

Credit fears grip Asian stocks
Thu Aug 9, 2007 11:04PM EDT
By Ian Chua

HONG KONG (Reuters) - Asian stocks fell across the board on Friday and the yen extended gains as investors dumped riskier assets following a rout in global markets sparked by a flare-up in credit jitters.

The fall came after U.S. stocks tumbled, with the Dow and S&P down nearly 3 percent.

Major central banks moved to try and calm nerves by increasing the funds available to money markets amid a rush to cash and other liquid assets.

Safe-haven bonds jumped, with yields on benchmark 10-year Japanese government bonds (JGBs) sinking to a 2-½ month low as expectations of an interest rate rise from the Bank of Japan this month faded in the market turmoil.

News that France's biggest listed bank, BNP Paribas, had frozen $2.2 billion worth of funds on Thursday due to the U.S. subprime mortgage woes spooked investors, prompting action from central bankers.

The European Central Bank injected a record $130.6 billion into Europe's money markets to prevent a financial system seizure, while the Federal Reserve pumped a more-than-normal $24 billion in its regular operations but analysts said did not amount to an emergency injection of liquidity.

"The injections by the ECB and the Fed are a little surprising, and make me wonder if they know something that the rest of the market doesn't," said Edward Meir, commodities analyst at MF Global.

Central banks in Japan and Australia added more than usual amounts into their banking systems, while Singapore and South Korea said they stood ready to inject additional liquidity if needed.
RISK APPETITE FALLS

The Chicago Board Options Exchange Volatility Index, Wall Street's main gauges of investor anxiety, spiked to its highest since early 2003 overnight.

Spreads of emerging market sovereign bonds over U.S. Treasuries another important measure of risk appetite, widened 5 points to 208 after a 9 basis point move on Thursday.

The spreads are approaching year-wide levels of 226 basis points struck last month.

By the end of morning trade, Tokyo's Nikkei average was down 2.6 percent, while MSCI's measure of Asia Pacific stocks excluding Japan dropped 3.3 percent to a 1-½ month low.

At the trough, the MSCI index was down 9.8 percent from the July 24 record high -- its biggest fall since the 18 percent slide from May to early June last year.

Major markets in the region including Hong Kong, South Korea and Singapore were all down more than 3 percent.

Financial stocks were among the hardest hit amid the credit fears with Australia's Macquarie Bank down 6.3 percent and South Korea's Shinhan Financial Group sliding 5.6 percent.

The stock market rout also hit industrial metals and oil prices on Thursday, which in turn knocked down resource stocks such as global miners BHP Billiton and Rio Tinto BHP fell 4.1 percent, while Rio shed 3.6 percent.

Japanese exporters including Canon Inc. were further hammered by a jump in the yen as investors shunned risky low interest rate-funded trades.

YEN FIRMS

"What we're seeing is unwinding of carry trades, and as a result, commodity, oil and stocks are being sold. The only financial instrument that is being bought is bonds," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities Co. Ltd.

In carry trades, investors borrow in low-interest rate currencies, often the yen, to invest in higher-yielding riskier assets such as the New Zealand currency.

The high-yielding kiwi has fallen 10 percent against the yen in the past three weeks

The Japanese currency extended its rally against the dollar and euro as investors continued to pare their risk exposure funded by borrowing low yielding currencies such as the yen.

The dollar fell about 0.10 percent to 118.05 heading towards a four-month low of 117.19 yen plumbed earlier this week.

The euro lost 0.24 percent against the Japanese unit from late U.S. levels to 161.22 yen nearing a three-month low of 160.47 yen touched last week.

Against the dollar, the single currency eased to $1.3656 still struggling after Thursday's fall.

London Brent crude edged up 11 cents to $70.32 after a 78 cents slide in the previous session, while spot gold edged up to $663.30 an ounce, finding a steadier footing after a 2 percent slide to one-week lows in New York.

(Additional reporting by Umesh Desai in HONG KONG and Nick Trevethan in SINGAPORE)