* Financial sector fears add to Asia market woes
* Japan megabanks have $44 bln in Fannie/Freddie
debt-report
* Risk aversion is on the rise
(Repeats to more subscribers)
By Kevin Plumberg
HONG KONG, July 15 (Reuters) - Asian stocks fell on
Tuesday, as investor confidence waned in the region's financial
sector, which faces high inflation, a stricter lending
environment and massive volatility from overseas markets.
The dollar steadied near a record low against the euro
after rising briefly on Monday on the U.S. announcement of an
emergency plan to support two struggling top mortgage lenders,
but worries about economic growth and the financial system
capped its rise.
Megabanks in Japan, Asia's richest economy, had roughly 4.7
trillion yen ($44.3 billion) in debt issued by U.S. mortgage
lenders Fannie Mae and Freddie Mac, whose stock plummeted last
week on fears about solvency, an article said on Tuesday,
adding to worsening sentiment on equities. []
Investors' willingness to take risks was further drained by
a shift in focus from lending institutions that are believed to
be too big to be allowed to fail, to ones that are small enough
to collapse. Overnight the S&P U.S. financial sector index
<.GSPF> fell to the lowest in nearly a decade.
Add to all that oil prices, which have remained above $140
a barrel <CLc1> for six of the last eight days, and investors
have increasingly abandoned stocks for the relative safety of
assets like Japanese government bonds, whose benchmark 10-year
yield hit a 2-month low.
"With inflation rising, you would expect central banks to
raise rates, which will flatten out the yield curve -- and that
means banks will not be so profitable here," said Mixo Das,
equity strategist with Lehman Brothers in Hong Kong.
"Lending standards are tightening so banks are expected to
lose money," he said.
Japan's Nikkei share average <> fell 1.4 percent to
the lowest since April 1.
The country's biggest bank, Mitsubishi UFJ Financial Group
<8306.T>, slid 4.1 percent and No. 2 Mizuho Financial Group
<8411.T> declined 3.5 percent after the Nikkei business daily
said those banks had some of the biggest exposure in Japan to
debt issued by Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
Shares traded in the Asia-Pacific region, excluding Japan,
dropped 1.2 percent, bringing the year-to-date losses to 22.7
percent, according to an MSCI index <.MIAPJ0000PUS>.
Australia's benchmark index <> tumbled 1.4 percent to
a two-year low, weighed by shares of the country's top banks
like Macquarie Group Ltd <MQG.AX>, down 5.5 percent, and
Commonwealth Bank of Australia <CBA.AX>, down 3.4 percent.
Hong Kong's Hang Seng <> sank 2.3 percent, with HSBC
<HSBA.L><0005.HK>, Europe's largest lender, the top weight on
the index for the second consecutive day.
Besides the dramatic exit from Fannie and Freddie assets in
the last week, investors on Friday witnessed the fall of
IndyMac Bancorp <IMB.N>, the third-largest bank failure in U.S.
history.
Volatility, often the nemesis of portfolio managers, has
been on the rise in the last few months, and indications of
risk-taking have deteriorated.
Wall Street's so-called gauge of fear, the Chicago Board
Options Exchange Volatility index, climbed to a four-month high
on Monday, up for the fourth straight day.
Results forthcoming from JPMorgan Chase & Co <JPM.N>,
Merrill Lynch & Co Inc <MER.N> and Bank of America Corp
<BAC.N>, should offer some indication to what extent credit
stress fallout is worsening.
Meanwhile, the so-called TED spread indicator of credit
risk popped to the highest since May 1 overnight. The TED
spread is the difference between 3-month U.S. inter-bank
borrowing rates and the 3-month U.S. Treasury bill yield.
In such a risk-averse environment, government bonds have
thrived.
The benchmark Japanese 10-year yield <JP10YTN=JBTC>, which
moves in the opposite direction of the price, was down 4 basis
points at 1.540 percent, after hitting a three-month low of
1.535 percent.
The yield has fallen more than 35 basis points since it
struck an 11-month peak of 1.895 percent in mid-June.
Many traders in the foreign exchange market were awaiting a
speech from Federal Reserve Chairman Ben Bernanke later in the
day, with some dealers pointing to instability in the financial
sector as a reason for persistent dollar weakness.
The euro was up 0.1 percent at $1.5923 <EUR=>, near an
all-time high above $1.6018 reached in April. Against the yen,
the dollar was down 0.3 percent to 105.90 yen <JPY=>.
The recent breakout of credit-related fears have compounded
the problems policymakers face in Asia, who are already dealing
with high inflation and increasingly sluggish growth. Some
central banks have been propping up their own currencies to
fend off upward price pressures, but this is likely a losing
battle.
"The history of intervention shows a very low success rate,
and as global capital markets have developed, central banks and
governments have found it increasingly difficult to control the
price of domestic assets without formally barring domestic and
international investors," said Sean Darby, chief Asia
strategist with Nomura Securities in Hong Kong.
"The Asian authorities will need to refrain from fuel and
food subsidisation, and raise real interest rates if they are
to keep inflation from taking hold," he said in a note.
(Editing by Kim Coghill)
