Asia stocks sag as credit fears hurt banks

By Kevin Plumberg Reuters - Tuesday, July 8 03:54 am

HONG KONG (Reuters) - Asian stocks fell on Tuesday, weighed by the financial sector after sharp declines in shares of Fannie Mae and Freddie Mac on funding concerns reminded investors about the fragility of global credit markets.

Oil rose by more than half a dollar, rebounding from the previous day's near $4 plunge as the U.S. dollar weakened. But the sharp decline in crude prices overnight dragged down energy-related stocks.

A Lehman Brothers research report said a pending accounting change could force the two largest U.S. mortgage funders -- that both have the U.S. government's implicit backing -- to raise a combined $75 billion (38 billion pounds) in capital.

That knocked shares in the U.S. financial sector to the lowest in five years, fuelled a rally in Japanese government bonds and dampened a willingness to take risks.

"U.S. financial shares fell on concerns about a possible need for Fannie Mae and Freddie Mac to raise capital, and that should weigh heavily on Japanese bank shares as well," said Fumiyuki Nakanishi, group manager of the investment information department at SMBC Friend Securities.

Japan's Nikkei share average fell 2 percent, down for the 13th time in the last 14 days. Mitsubishi UFJ Financial Group, Japan's top lender, fell 2.5 percent.

South Korea's benchmark KOSPI index fell 1.7 percent to the lowest since mid March, when the Federal Reserve backed a plan for JPMorgan to buy and effectively bail out Bear Stearns, removing a major source of concern for Wall Street and global markets.

Hong Kong's Hang Seng reversed the previous day's gains and fell 1.3 percent, with index heavyweights HSBC and China Mobile the largest drags.

Shares of companies in the Asia-Pacific region were down 0.3 percent, according to an MSCI index.

Fears that a combination of high inflation and feeble growth known as stagflation would hit company earnings and continue to depress consumer spending have kept European, Asian and U.S. equity markets either in or very near to bear market territory.

However, fund managers have been continuing to take money out of emerging markets in Asia and place it in developed markets on the view high inflation will choke growth, EPFR Global said in a report.

Last week, Asia ex-Japan equity funds posted outflows for the sixth consecutive week, while Japan equity funds took in new money for the ninth straight week.

"Asia ex-Japan equity funds ... are being sapped by doubts that many key markets in the region can effectively balance the competing policy goals of a competitive currency for exporters and a monetary policy tight enough to effectively rein in rising inflation," said analysts with EPFR Global, a research firm that tracks $10 trillion in assets.

Crude prices edged up 0.4 percent to $141.94 a barrel, off from the record high of $145.85 hit last week but still up 48 percent since the year began. Prices fell sharply overnight on signals that Iran will be more flexible in negotiations over its nuclear program, which some in the West fear will be used to make atomic weapons.

The dollar eased 0.2 percent to 106.95 yen, weighed down by renewed credit worries. The euro was little changed at $1.5730, near Monday's session high around $1.5750.

Japanese government bonds rose, recovering from a sharp fall the previous day, on lower equity markets and renewed worries about the health of the financial sector.

The benchmark 10-year yield fell 4 basis points to 1.655 percent.

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