* MSCI Asia ex-Japan falls to 2-year low
* Japan, South Korea, Hong Kong stocks down 5-6 percent
* 10-yr U.S. Treasury yield lowest in 6 months
* Crude falls 4 pct to below $92 as risky assets dumped
(Recasts, updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Sept 16 (Reuters) - Asian stocks dropped, with
markets in Japan and Hong Kong down 5 to 6 percent, and
government debt prices climbed on Tuesday, on investor fears
that trouble at American International Group will spread
globally so soon after Lehman Brothers filed for bankruptcy.
European stock markets were expected to open down as much
as 3 percent, according to financial bookmakers. U.S. S&P 500
futures <SPc2> were down 1 percent.
"There is no hiding for anyone here. The global money pool
-- we all either have to chip into it or get some money out of
it, and we're all affected by it," said Credit Suisse chief
strategist Adnan Kucukalic in Sydney.
The yield on the 10-year U.S. Treasury note dropped to a
six-month low with increased speculation about an aggressive
U.S. Federal Reserve interest rate cut, a day after China's
central bank surprised markets with its first rate reduction
since early 2002 to stimulate growth. Japanese government bond
futures jumped by their daily limit of three full basis points.
Asia-Pacific shares outside Japan hit a 2-year low after
one of the most explosive 48-hour periods in finance that
accelerated a sweeping move out of risky assets. Investors
bailed out of commodity-related funds, knocking oil prices
below $92 a barrel and weighing broadly on metals prices.
Lehman Brothers <LEH.P> filed for bankruptcy, Bank of
America agreed to buy Merrill Lynch, the Fed expanded its
emergency liquidity provisions and American International Group
(AIG) <AIG.N>, once the world's biggest insurer, was seriously
constrained by short-term funding trouble. []
Tokyo's Nikkei share average <> dropped 4.95 percent
to its lowest in three years.
Markets in Japan, South Korea, China and Hong Kong had been
closed on Monday, and quickly followed the sell-off in New
York, where the Dow Jones industrial average <> slid more
than 500 points, or 4.4 percent, in its biggest one-day point
drop since re-opening after the September 2001 attacks.
The financial sector was hit by a wave of selling. Shares
of Japan's top lender Mitsubishi UFJ Financial Group <8306.T>
fell 7.7 percent and Australia's Macquarie Group <MQG.AX>
dropped 6.5 percent.
An MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> was down 4.7 percent to the lowest since August
2006, and has now slumped 44 percent from a peak last October.
WORLD WATCHES AIG'S FATE AS CREDIT SPREADS WIDEN
The indiscriminate selling in risky assets has hurt
emerging market equities especially hard. Valuations of
emerging market stocks are currently 9.2 times expected
earnings 12 months from now, compared with a low of 10.2 times
reached during the Asian financial crisis about a decade ago.
Still, there appeared no near-term end to the shift out of
the region. The cost of protection against default and
restructuring surged in emerging Asia reflecting the growing
expense of capital.
The iTRAXX Asia ex-Japan high yield index <ITAHY5Y=IE>, a
gauge of risk aversion, rose to a record high in anticipation
of a deeper impact as a result of U.S. financial sector havoc.
AIG, whose stock plummeted 61 percent overnight, secured a
$20 billion lifeline brokered by New York State officials on
Monday, but Standard & Poor's cut its long-term counterparty
rating on the insurer. Moody's also downgraded AIG's senior
unsecured debt rating. []
Time was not on the company's side. A default by the
company could have big ramifications in the global financial
system because of the firm's diverse credit and debt derivative
holdings.
"This would have a much bigger impact than a bank going
down like Lehman or Bear or even a Wachovia or WaMu in the U.S.
AIG has a much bigger presence globally. Their reach to a
global customer base is quite sizable," said Lorraine Tan,
director of research, Asia with Standard & Poor's in Singapore.
The U.S. dollar slipped to 104.30 yen after ending
overnight in New York around 104.54 yen. It had its biggest
single-day decline against the yen on Monday in nine years.
The euro crept up to $1.4272 after ending at $1.4263 on
Monday, but the 15-nation currency slipped to 148.80 yen from
149.10 yen <EURJPY=> on Monday.
The U.S. dollar was dumped on Monday as markets quickly
priced in a 90 percent chance <FEDWATCH> of a 25 basis point
rate cut by the Fed after a meeting later and some analysts
speculated about a more aggressive 50 basis point cut.
Japanese and U.S. government debt yields, which move in the
opposite direction to prices, dropped as investors sought
safety.
The yield on the 10-year Japanese government bond
<JP10YT=JBTC> in the cash market fell to a 5-month low of 1.375
percent before recovering to 1.465 percent.
The yield on the policy-sensitive U.S. two-year Treasury
note <US2YT=RR> fell to 1.67 percent, the lowest since
mid-April, before edging back up to 1.71 percent. The 10-year
yield <US10YT=RR> slipped to 3.37 percent from 3.41 percent
late on Monday in New York.
Oil <CLc1> dropped $3.68 a barrel to $92.03, its lowest
since mid-February. Crude was thrown into the pile of assets
being liquidated by investors around the world to fund losing
bets and to cut their exposure to risk.
Even gold <XAU=>, a traditional safe-haven in times of
financial stress, fell 1.45 percent as investors treated it as
another risky commodity.
(Additional reporting by Sonali Paul in MELBOURNE; Editing by
Jan Dahinten)
