Asian stocks hit by U.S. turmoil
International Herald Tribune
By Matthew Saltmarsh and Martin Fackler
Published: September 16, 2008

PARIS: Asian stocks reeled Tuesday amid fears about financial contagion from the turmoil engulfing Wall Street, while European indexes posted slightly more moderate declines as a glimmer of stability seeped into the market after sharp falls overnight.

Investors remained convinced that interbank lending would be stagnant for some time and continued to worry about exposure of local insurers and banks to assets held by the troubled U.S. firms.

The markets were jittery after the downgrade of the credit ratings of the giant insurer AIG by Standard & Poor's and Moody's, which threatened efforts to raise emergency funds to keep the company afloat. That followed the hammer blow of the collapse of Lehman Brothers on Sunday and the sale of Merrill Lynch.

But several factors lifted the mood in Europe slightly. Analysts pointed to increasing hopes of an interest rate cut later Tuesday from the Federal Reserve, further aggressive fund injections from central banks and a positive economic survey in Germany.

Also, Barclays confirmed that it was in talks with Lehman Brothers about the possible acquisition of some assets at the American bank.

"Yesterday it looked like a Category 4 hurricane," said Henk Potts, equity strategist at Barclays Wealth in London. "Today it looks more like a tropical storm - still destructive but maybe not devastating."

The Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, lost 1.8 percent, to 3,094.66 in afternoon trading. The CAC-40 lost 1 percent in Paris, the German DAX shed 1.5 percent and the FTSE-100 declined 2.4 percent in London.

Equity markets in Tokyo, Hong Kong and Seoul all slid in their first day of trading since the events Sunday on Wall Street. Those markets had been closed Monday for national holidays.

In Tokyo, the largest Asian stock market, the benchmark Nikkei 225 dropped 4.95 percent Tuesday to 11,609.72 points, a three-year low. The broader Topix index fell 5.07 percent to 1,117.57.

Elsewhere in Asia, the Kospi in Seoul fell 6.1 percent, and the Hang Seng index in Hong Kong closed down 5.44 percent to an almost two-year low. Taiwan's leading index fell 4.9 percent, its lowest in three years, while the composite index in Shanghai dropped 4.5 percent.

Analysts said the sell-off in Tokyo was led by foreign investors. By contrast, they said, most the buyers were big Japanese institutional investors, who saw a chance to pick up stocks on the cheap.

"The United States is in trouble, so they think everywhere else is also in trouble," said Kiichi Fujita, a strategist at Nomura Securities, the largest Japanese brokerage.

"This sell-off won't stop until foreigners stop panicking," he added, predicting more days of volatile trading ahead.

In Hong Kong, the HSBC lost 4.4 percent, while the Chinese bank ICBC dropped 7.7 percent. In Japan, banks fell even further after Lehman revealed in its bankruptcy filing that some of its biggest creditors were Japanese lenders. According to the filing, seven Japanese banks have $1.6 billion in outstanding loans to Lehman, including Aozora Bank, with an exposure of $463 million, and Mizuho Corporate, with $289 million.

Japanese banks said their exposure was in fact much smaller than Lehman had indicated, largely because they had hedged the loans with derivatives. Still, Aozora fell almost 16 percent, while Mizuho Financial Group fell 10 percent and Shinsei dropped almost 16 percent.

Tuesday's declines came despite a fall in oil prices, which normally would have buoyed the outlook for consumer spending and corporate profits.

The European Central Bank awarded €70 billion in a one-day money-market auction. The Bank of Japan added a total of ¥2.5 trillion, or $24 billion, and the Bank of England pumped in £20 billion. Banks in Australia and Switzerland took similar steps.

A senior European regulator, who was not permitted to speak publicly, said the money markets and settlement of trades appeared to be functioning "reasonably well." The main concern Tuesday, he added, was a lack of liquidity in dollar swaps - complex transactions where cash streams or financial assets are swapped as a means of hedging exposure to risk.

Andreus Hürkamp, an analyst at Commerzbank in Frankfurt, said that after the moves to lower borrowing costs recently by monetary institutions in China, Australia and New Zealand, markets were turning their attention to the Federal Reserve and the European Central Bank.

Speculation built that the Fed would move later Tuesday to lower overnight lending between banks by a quarter point to 1.75 percent. Futures contracts on the Chicago Board of Trade put the odds on a cut at 90 percent, compared with 2 percent a week ago.

Hürkamp said that in Europe, interbank lending was not likely to resume in any meaningful way until the three-month Euribor interbank lending rate - a benchmark used by many business to negotiate contracts - started to drop from its current around 5 percent, closer to the benchmark rate on 10-year German government bonds, at 4 percent.

The current situation presents what traders call an "inverted yield curve," meaning cash or short-term yields are climbing and pay higher interest rates than riskier long-term bonds. Traders typically see it as a sign of an extremely weak economy ahead.

One factor that could relieve the pressure, analysts said, would be a signal from the European Central Bank that it is considering lowering interest rates at some point in the future.

The yield on U.S. Treasury notes dropped Tuesday amid the speculation about U.S. rate cuts. The yield on the benchmark U.S. 10-year benchmark security fell 8 basis points to 3.309 percent. The yield on the 10-year German bund slipped 10 basis points to just below 3.950 percent. Japanese government bond yields were also lower.

On currency markets, the Japanese yen is still perceived as a haven from the battered dollar. On Tuesday in London, the dollar was trading steadily at ¥103.8; it had been trading at more than ¥107 on Friday. The dollar was slightly stronger at €1.4191.

Analysts in Europe found some solace in a report Tuesday that showed German investor confidence rose for a second month. The ZEW Center for European Economic Research said its index of investor and analyst expectations rose to minus 41.1 from minus 55.5 in August. It was the highest reading since April and appeared to be helped by a decline in oil prices and a weaker euro.

Investors will get further clues on the outlook for financial markets and the economy Tuesday as the investment bank Goldman Sachs posts quarterly results.

Martin Fackler reported from Tokyo.

Original Text