Asian Stocks Extend Falls On Credit Concerns

Tumbles in Asian stocks and high-yielding currencies accelerated late Wednesday, spurred by risk aversion to the unfolding shakeout in global credit markets and indications that Wall Street is facing another day of losses.

Weaker U.S. stock futures, and spreadbettor calls for European markets to fall heavily sent a fresh wave of selling through Asian stock markets, while the Japanese yen rose strongly, reflecting the loss of risk appetite. Lofty crude oil prices were also cited for the weakness in shares, with the front-month September Nymex crude contract sticking near the $78 a barrel mark and with its all-time intraday high of $78.40 still in its sights. Analysts now say volatility is likely to persist until the U.S. stock market is able to stabilize, given that U.S. subprime mortgage sector troubles continue to dominate. "When Wall Street sneezes, we catch a cold," said an institutional trader in Sydney who declined to be named. "It's driven by fear, and some of the complacency is coming out of the market." U.S. stock futures are lower in screen trade, with Nasdaq 100 futures down 0.9% and S&P 500 futures down 1.1%. The U.K.'s FTSE 100 index dropped 2.1% at the open, with German and French stocks getting knocked even lower. Problems at another Australian fund manager, this one owned by Macquarie Bank Ltd. (MBL.AU), have spurred fresh concerns about contagion into broader credit markets from the subprime troubles in the U.S. Also, the Wall Street Journal reported late Tuesday that Bear Stearns Cos. (BSC) faces big losses in a third fund that has roughly $900 million in mortgage investments. Analysts also cited the 90% slide in small-cap American Home Mortgage Investment in the U.S., after the company warned that pressure to repay creditors may cause it to liquidate its assets.

Analysts Stick To 'Needed Correction' View

Many analysts generally hold the view that Asian market volatility is providing a much-needed correction from overly exuberant levels. Much depends on how much more U.S. markets fall, and how wide the credit market troubles spread. Repricing of risk could continue for some days yet. "Previously the market view had been the problems were contained and wouldn't spread to U.S. consumption," the engine of U.S. economic growth, said ICEA analyst Ernie Hon in Hong Kong. Now there is some concern about a U.S. slowdown, which would affect Asia's export-dependent economies. Still, there aren't yet signs of the U.S. economy being affected and Asian equity markets should be supported by a good corporate earnings outlook and strong economic growth in the region, analysts added. Also, "liquidity remains very high despite concerns of a 'dry-up' on the credit side," said Credit Suisse in a research report. The credit market difficulties may "affect leveraged buyouts and overall merger and acquisition activity (but) liquidity remains abundant for Asia due to rich balance sheets, cash-rich sponsors looking to buy-back shares, increasingly large and dominant domestic institutions and the petrodollars from the Middle East," it said. Global emerging market valuations are attractive, said UBS in a report, adding that it sees market weakness as an opportunity to increase exposure. Shares in Macquarie fell 11% after warning that investors in its Fortress Investments Ltd. fund face losses of up to 25%, weighing on the benchmark S&P/ASX 200 index, which skidded 3.3%. The news spurred further unwinding of carry trades with the high-yielding currencies hit. Around 0630 GMT the Australian dollar was down at US$0.8464; against the yen, it was trading lower at Y99.67 and below Y100 for the first time since late May. The New Zealand dollar was also notably weaker against the yen, as was the British pound. The U.S. dollar meanwhile had fallen under the key Y118 level to be around Y117.75, while the euro was down near Y160.70. Stock markets took a hit with the Nikkei 225 ending 2.2% lower and South Korea's Kospi Composite finishing down 4%. At one point the Korea Exchange halted stock program trading for five minutes due to accelerating losses. Taiwan's Taiex ended down 4.2% at its lowest close in five weeks. Hong Kong's Hang Seng Index was down 3.5% late in the session with Singapore's Straits Times Index down 3.9% and Thailand's SET index 2.2% lower. Even China's red-hot share markets were seemingly not immune, with the Shanghai Composite Index tumbling 3.9%. Credit spreads continued to widen while government bonds were higher, trading off gains in U.S. Treasurys. Lead September Japanese Government Bond futures gained 0.40 to 133.55 after hitting an intraday high of 133.59; the 10-year cash yield broke below 1.75% for the first time since May 31, down 4.5 basis points at 1.745%. The 10-year U.S. Treasury note was 12/32 higher at 98 15/32, yielding 4.696% compared with 4.74% late in New York. Analysts said the credit market-related problems at Macquarie are raising concerns of similar announcements in coming days from other funds, as they post their month-end numbers for July. "This localizes a global problem. It's an indication that concerns about global credit markets may actually weigh on Australian and New Zealand companies," said Bank of New Zealand currency strategist Danica Hampton.