* Asia stocks drop 1.5 pct, hold up after Wall St. slide
* More profit-taking in risky assets expected before
year-end
* Aussie and higher-yielding FX bounce back from early drop
* Volatility spike spooks, Nikkei implied vol rise limited
By Eric Burroughs
HONG KONG, Nov 2 (Reuters) - Asian stocks slid on Monday,
with Seoul hitting a two-month low after a sell-off in banking
shares slammed Wall Street, a slide viewed as a sign that
investors are losing faith in the economic recovery.
Worries about the U.S. financial sector resurfaced after
CIT Group Inc <CIT.N>, the lender to small and mid-sized U.S.
companies, filed for bankruptcy and an accounting expert said
Citigroup may need further write-downs. []
[]
But the fallout on Asian equity markets was limited and
higher-yielding currencies quickly recovered from early losses,
with some market players blaming the volatile moves on
profit-taking and portfolio reshuffling before year-end.
The dollar dipped while oil prices edged higher to bounce
back from a sharp drop on Friday along with shares, with U.S.
crude oil <CLc1> up 25 cents a barrel to $77.25.
Hedge funds and other players were cited as sellers of
emerging market stocks and currencies last week, looking to
take profits on their best trades before many funds close their
books for the year in November.
"Further profit-taking in risk positions is expected this
week and into the end of the year," said Patrick Bennett, Asia
currency and rates strategist at Societe Generale in Hong Kong.
The MSCI index of Asia-Pacific shares outside Japan
<.MIAPJ0000PUS> fell 1.5 percent, touching a one-month low,
while the Thomson Reuters index of regional stocks
<.TRXFLDAXPU> shed 1.8 percent.
Japan's Nikkei average <> dropped 2.7 percent,
mirroring the 2.8 percent slide in the U.S. S&P 500 <.SPX> on
Friday -- its biggest one-day drop since July. But futures on
the S&P <SPc1> edged up in Asia, providing some relief that the
selling pressure would not extend into the new month.
A spike in the VIX volatility index on the S&P <.VIX>,
known as Wall Street's fear gauge, also stirred worries that
investors were starting to brace for a deeper drop in stocks.
But the move in the equity options market was not mirrored
in Asia. Implied volatility, a gauge of option market
expectations of future moves, on Nikkei futures <JNIATMIV.OS>
edged up only slightly.
The slide in U.S. shares came despite an array of positive
third-quarter earnings. According to Thomson Reuters data, 80
percent of the 344 companies in the S&P 500 that reported
earnings so far have beat analyst expectations.
Gains in higher-yielding currencies, weighed on the dollar
and the gauge of its performance against six major currencies
dipped 0.1 percent to 76.277 <.DXY>. The Australian dollar rose
0.2 percent to $0.9007 <AUD=D4>, while the euro edged up 0.2
percent to $1.4740 <EUR=>.
Some of the early volatility in higher-yielding currencies
was due to a sharp fall in the South African rand <ZAR=D4> tied
to selling by a Japanese margin trader broker. Traders
suspected that a mistaken trade may have sparked the sharp
drop.
Government bonds gained on the stock market woes. The
benchmark 10-year Japanese government bond yield <JP10YTN=JBTC>
dipped 2 basis points to 1.385 percent, down from a 2-
