Asia stocks fall on deepening growth fears

Thu Aug 7, 2008 2:55am EDT

By Kevin Plumberg

HONG KONG (Reuters) - Asian stocks fell on Thursday, as a sustained decline in oil prices could not shake a sense of gloom among investors about financial sector instability and the worsening global growth outlook.

European stock markets were expected to open as much as 0.5 percent lower, according to futures markets, after European insurer Allianz (ALVG.DE: Quote, Profile, Research, Stock Buzz) warned about its profit forecast for 2009 and the world's largest insurer American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) chalked up a quarterly net loss of $5 billion.

Dealers expected Barclays Plc (BARC.L: Quote, Profile, Research, Stock Buzz) to fall as much as 3 percent at the open after the bank said first-half profits fell 33 percent on $4 billion of write downs, though that was not as bad as expected.

The U.S. dollar slipped against the yen after jumping to a seven-month high on Wednesday. It was also slightly weaker against the euro ahead of a European Central Bank policy decision due later, widely expected to keep interest rates on hold at 4.25 percent.

Crude oil was trading just below $119 a barrel, having tumbled nearly 20 percent from July's record high, as expectations for U.S. energy demand continue to deteriorate.

Concerns about wavering demand in China, whose economy has devoured natural resources for the last decade and pushed up commodity prices, also weighed on copper prices.

Lower oil prices could be interpreted as relief for U.S. consumers, on whom Asia depends for export demand. But inflation was still a global threat, bad loans continued to dog banks and insurers, and investors faced the prospect that all of the Group of Seven rich nations could slip into recession.

As a result, optimism was in short supply.

"Certainly the environment is one that should be positive, with the weaker yen and lower oil prices," said Hideyuki Ishiguro, supervisor at the investment strategy department at Okasan Securities in Tokyo. "But the idea that Japan's economy isn't good is spreading."

Japan's Nikkei share average .N225 fell about 1 percent, led by an 11 percent drop in shares of air-conditioner maker Daikin Industries Ltd (6367.T: Quote, Profile, Research, Stock Buzz) after the company cut its earnings outlook because of sluggish sales in Europe.

Shortly after the market closed in Japan, Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz), the world's biggest car maker, said quarterly net profit fell 28 percent but it kept its forecasts unchanged.

Outside Japan, Asia-Pacific stocks .MIAPJ0000PUS were largely unchanged, but within sight of a 16-month low plumbed on Tuesday.

Hong Kong's Hang Seng index .HSI rose 0.6 percent, lifted by a 1.7 percent rise in shares of HSBC Holdings (0005.HK: Quote, Profile, Research, Stock Buzz).

Cathay Pacific Airways (0293.HK: Quote, Profile, Research, Stock Buzz) was the top percentage decliner on the index, down 4.6 percent, after the airline on Wednesday posted its first interim loss in five years.

CENTRAL BANK DILEMMA

South Korea's benchmark KOSPI dropped 0.9 percent, weighed down by the financial sector after the Bank of Korea on Thursday raised its main interest rate by a quarter percentage point to its highest in 7-½ years to battle price pressures.

"Clearly inflation is up, but there are massive growth risks for the Korean economy. The entire household sector and small and medium-sized enterprise sector are hugely leveraged. There is likely to be a downturn in economic growth," said Frederic Neumann, Asia Pacific economist with HSBC in Hong Kong.

Other central banks around the world face the same dilemma -- whether to tighten borrowing conditions now to stem inflation and risk a sharper economic slowdown.

Earlier this week, Indonesia's central bank raised rates by 25 basis points for the fourth time this year, but the Reserve Bank of Australia kept its rates on hold.

The U.S. Federal Reserve held rates steady at 2 percent on Tuesday, expressing concerns about both the slowing economy and rising inflation. The Fed indicated it is in no rush to push borrowing costs higher.

That has helped to spur investors' willingness to take risks, a primary driver in boosting the U.S. dollar to its highest level against the yen in seven months on Wednesday.

The dollar was down 0.1 percent against the yen at 109.50 yen. The euro edged up 0.3 percent to around $1.5457 ahead of the ECB's meeting later in the day.

The potential for a global recession was lurking in the minds of many investors, with a steady stream of bad news out of the corporate sector and economic data indicating a recovery has not arrived yet.

"All the G7 economies are now in a recession or headed in the short run towards a recessionary hard landing," said Nouriel Roubini, chairman of RGE Monitor, a New York economics research firm, in a blog posting on Wednesday.

"While the world will technically avoid a global recession (defined by the IMF as global growth below 2.5 percent) it will get quite close to it by mid-2009 as global growth will slow down to a near recessionary 3 percent."

Japanese government bond futures briefly hit a four-month high on concerns about the outlook for Japan's economy and due to a fall in Tokyo share prices.

September 10-year JGB futures were down 0.08 point after earlier rising as high as 137.46, the highest level for a lead futures contract since late April.

Gold was up 0.6 percent at $883.95 an ounce, but still more than $100 cheaper than in the middle of last month.