Asia stocks slip, oil rises, stagflation lingers

Tue Jul 1, 2008 3:31am EDT

By Kevin Plumberg

HONG KONG (Reuters) - Most Asian stock markets were down on Tuesday as oil and food prices showed no signs of defusing stagflation fears, particularly with soybean prices at a record and oil above $141 a barrel.

European stocks were expected to open broadly lower, with investors focused on euro zone and U.S. manufacturing data due later in the day.

Bookmakers expected Britain's FTSE to open down 5-7 points, Germany's DAX down 3-7 points, and France's CAC down 1-6 points.

Crude climbed to an all-time high of $143.67 overnight, causing investors to grow increasingly intolerant of risk in their portfolios and seek relative safety in the yen.

The 40 percent surge in oil prices this year, even though global economic growth has slipped below its long-term trend, has made stagflation -- increased inflation combined with slowing growth -- a top fear for investors and a major headache for policymakers.

After a five-year bull market, Asian equities have fallen sharply this year on concerns that the credit crisis will sap demand for exports and inflation will erode returns. As a result, valuations have dropped from 17.7 times expected earnings in the next year to around 13 times, according to Standard & Poor's.

"One positive thing, if you could call it positive, is that shares have gotten significantly cheaper. But I am not sure if this alone would be enough to trigger foreign buying," said Kim Joong-hyun, a market analyst at Goodmorning Shinhan Securities in Seoul.

Japan's Nikkei share average finished 0.1 percent lower to record its longest losing streak in four years, as global growth worries weighed on exporters such as Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz).
Automakers had provided an early boost to the index, which on Monday posted its largest first-half decline since 1995, after a report that Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) plans to sell a hybrid version of its Camry in China in 2010.

Asia-Pacific shares traded outside of Japan dipped 0.8 percent to a three-month low, according to an MSCI index. The pan-Asia index was largely unchanged.

In the last six months, the Asia index chalked up its biggest first-half decline in 16 years mainly because of heavy losses in China and Vietnam.

CAPITULATION, ANYONE?

Korea's KOSPI fell 0.5 percent, down for a fourth consecutive session after a Bank of Korea official said inflation could stay above target for longer.

Chinese shares fell 1.8 percent on the Shanghai composite index as investors reacted negatively to news of yet more IPOs coming to market, anticipating a glut of fresh equity.

Hong Kong's market was closed because of a public holiday.

Some analysts believe that the next three months, smack dab in the thick of stagflation, is a good time to sift through the markets for good buys.

"The third quarter is going to be a time to go back and revisit the Asian markets because, by then, we'll have seen a real capitulation phase," said Nomura chief Asia strategist Sean Darby at a briefing in New York.
"Equities will probably be back to some of the lows we've seen in the last 10 years, but there won't be much financial distress, because the balance sheets are pretty good," said Darby, who is bullish on Korea, Malaysia, Thailand and Hong Kong, and would look to acquire Taiwan and Australia toward the end of the third quarter.

The bond market entered the second half on a downbeat note after a volatile past few months. The benchmark 10-year Japanese government bond yield, which moves inversely to the price, has declined around 20 basis points in the last two weeks to the lowest in nearly two months.

The yield rose 8 basis points to 1.67 percent on news that the June tankan's headline figure for big manufacturers was higher than the median market forecast.

South Korean government bond yields also rose after the country's central bank raised its inflation forecast.

The U.S. dollar rebounded slightly after slipping to a three-week low against the euro on Monday.

The euro was essentially unchanged against the dollar at $1.5767 ahead of a widely expected interest rate rise by the European Central Bank on Thursday. The dollar was down 0.4 percent at 105.63 yen.

U.S. light crude for August delivery was up $1.09 at $141.08 a barrel, after posting its largest first-half increase since 1999.

The blame for who is responsible for the surging cost of oil continued to be passed freely around the world.

Saudi Arabia's King Abdullah said even if production is raised oil prices will not go down, because speculators and taxes are what is behind the run up, according to the Arab Times.