* Financial sector fears add to Asia market woes
* Japan megabanks have $44 bln in Fannie/Freddie
debt-report
* Risk aversion is on the rise
(Updates prices, adds quote)
By Kevin Plumberg
HONG KONG, July 15 (Reuters) - Asian stocks fell to a
two-year low 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 U.S. dollar fell towards a record low against the euro
as traders worried about the stability of the financial system
despite the U.S. government's announcement on Sunday of an
emergency plan to support two struggling top mortgage lenders.
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 high oil prices 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.
"Sentiment is really fragile," said Louis Wong, research
director with Phillip Securities in Hong Kong. "Investors are
worried that there might be more bank failures, especially
small banks in the United States. Whenever you have this kind
of financial turmoil, banking stocks get hit."
Japan's Nikkei share average <> fell 2 percent to the
lowest since April 1.
The country's biggest bank, Mitsubishi UFJ Financial Group
<8306.T>, slid 4.8 percent and No. 2 Mizuho Financial Group
<8411.T> declined 4.5 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>.
BETTING AGAINST BANKS
Sentiment and risk apparently mattered more to investors
than the likelihood of a company's bottom line suffering from
direct exposure to bad debt.
Concern about the exposure was likely overdone, said Koichi
Ogawa, chief portfolio manager at Daiwa SB Investments,
pointing out that the debt is not "subprime" but backed by
mortgages made to borrowers with strong credit.
"There is no problem with Fannie and Freddie debt. You are
pretty much at the level of guarantee by the U.S. government."
Still, the MSCI pan-Asia equity index <.MIAS00000PUS>
dropped 2.2 percent to the lowest since August 2006.
Hong Kong's Hang Seng <> sank 3.5 percent, with HSBC
<HSBA.L><0005.HK>, Europe's largest lender, one of the heaviest
drags on the index for the second consecutive day.
Chinese banks like China Construction Bank <0939.HK>, whose
shares fell 5.1 percent and Industrial & Commercial Bank of
China <1398.HK>, down 5.4 percent, were among the biggest
percentage losers despite having been investor favourites a
week ago.
Australia's benchmark index <> tumbled 2.3 percent to
a two-year low, weighed by shares of the country's top banks
like Macquarie Group Ltd <MQG.AX>, down 6.2 percent, and
Commonwealth Bank of Australia <CBA.AX>, down 3.3 percent.
"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.
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.
PUMP UP THE VOLATILITY
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 <.VIX>, 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 on 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
five basis points at 1.53 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 <EUR=> inched up 0.2 percent from late U.S. trade
to $1.5941, not far from the record high of $1.6020 hit in
April.
The dollar fell 0.3 percent to 105.82 yen <JPY=>.
Gold <XAU=> fell to $970.00/971.00 an ounce by midday from
$971.20/972.20 in New York, but held within sight of its
strongest level in almost four months as surging oil prices and
financial market jitters boosted the metal's safe-haven appeal.
Oil <CLc1> eased 7 cents to $145.11 a barrel, but within
sight of last week's record above $147, as dealers weighed the
impact of high oil prices on global demand against fresh
threats of supply disruptions in Nigeria, Brazil and Iran.
(Additional reporting by Aiko Hayashi and David Dolan in
Tokyo)
(Editing by Kim Coghill)
