(Adds forex, Australia index)
* Oil rises more than $1, keeping stagflation fears high
* Asia ex-Japan stocks approach March lows, key chart
support
* Nikkei's longest losing streak in more than 40 years
By Kevin Plumberg
HONG KONG, July 2 (Reuters) - Asian stocks fell on
Wednesday, with Japan recording its worst losing streak in 43
years, as climbing oil and food prices exacerbated stagflation
fears, increasing the risk investors will capitulate and knock
the market even lower.
European stocks were flat to modestly higher, but high oil
prices, and a grim warning from British retailer Marks &
Spencer <MKS.L> on the consumer outlook may cap gains.
The need for stability became paramount as the outlook for
corporate earnings, business investment and consumer spending
all deteriorated in the face of upward price pressures,
supporting government bonds and gold.
Cathay Pacific <0293.HK> and M&S, two firms that warned
about their bottom lines, were the latest to take a hit as a
result of slower growth and high energy costs.
"Inflation is rising globally, and that is probably a
bigger scare than the second round of capital writedowns that
we're seeing in U.S. financials," said Mixo Das, strategist
with Lehman Brothers in Hong Kong.
"There's no indication inflation is peaking," said Das, who
recommended staying invested in sectors that are relatively
insulated from external price pressures such as utilities and
telecommunications companies.
For a poll on inflation in Asia, click on []
Japanese stocks, which earlier this year were hailed as the
smart buy amid rising global inflation, tumbled on fears that
high energy prices will curtail demand for exports from the
world's second-largest economy. The Nikkei share average ended
down by 1.3 percent at an 11-week low, having fallen for 10
days in a row -- the longest daily losing streak since 1965.
Hong Kong's Hang Seng index <> fell 1.5 percent,
weighed the most by losses at HSBC Holdings <0005.HK><0005.HK>
and China Mobile <0941.HK>. Cathay Pacific was the
second-largest decliner in Hong Kong after the company warned
of "disappointing" first-half earnings because of expensive jet
fuel.
Outside of Japan, shares in the Asia-Pacific region were
down 0.1 percent, according to an MSCI index <.MSCIAPJ> and
were within striking distance of lows not seen since mid March.
Another wave of selling could ensue on a convincing move
below those lows and a substantial rise in market volatility,
as investors dump losing positions even if it means taking a
big hit.
"There's quite an ominous technical pattern that we're
looking at in Asia," said Lawrence Balanco, technical analyst
at CLSA in Hong Kong. "It has been an orderly decline so far,
but the capitulation risk is out there."
Australian shares <> fell 0.9 percent on Wednesday,
inching closer to a 2008 closing low.
STAGFLATION FIXATION
Korean stocks were some of the biggest decliners in the
region, with the KOSPI index <> down 2.7 percent. Shares
of consumer technology firm LG Electronics <066570.KS> dropped
4.2 percent after dealers said JPMorgan slashed its price
target on the stock, citing lackluster wireless handset sales.
The market's focus remained on how stagflation -- the toxic
mix of rising inflation and slowing growth -- would hurt
consumer demand and corporate earnings. Modest gains on Wall
Street overnight were largely ignored.
For many investors around the world, the most important
event this week is the June U.S. employment report due on
Thursday. A larger-than-expected contraction in the U.S. labour
market would almost certainly spark fears about less demand for
the exports from Asia.
U.S. Treasuries and Japanese government bonds rose as
investors fled to relative safety from equity markets.
The benchmark 10-year Treasury note yield <US10YT=RR>,
which moves in the opposite direction of the price, ticked down
to 3.99 percent compared with 4 percent late in New York.
The 10-year Japanese government bond yield <JP10YTN=JBTC>
slipped 1.5 basis points to 1.655 percent.
The euro extended earlier gains versus the dollar to hit a
2-month high, up 0.25 percent at $1.5825 having hit a 2-month
peak of $1.5847 <EUR=>.
High food and energy prices, the often-cited culprits of
the surge in global inflation, showed no sign of letting up.
U.S. soybean prices, a critical import for China, rose to a
record high for a third day on concerns about dwindling supply.
Meanwhile, corn futures bounced from a two-week low hit on
Tuesday, putting upward pressure on prices of everything from
ethanol to soft drinks.
U.S. crude prices climbed $1.18 to $142.15 a barrel <CLc1>,
close to the record $143.67 a barrel hit on Monday, as tensions
grew between Israel and the world's fourth largest oil exporter
Iran.
Gold, often used by investors as a hedge against rising
inflation, rose to the highest since mid April, at
$940.30/941.30 <XAU=> an ounce.
