Asian Stocks Decline, Set for Worst Week Since August 2007

By Patrick Rial

Oct. 3 (Bloomberg) -- Asian stocks fell, driving the region's benchmark index to its biggest weekly drop in 13 months, as borrowing costs rose and concern grew that a U.S. $700 billion bank rescue plan won't prevent a recession.

Toyota Motor Corp., the world's second-largest automaker, plunged 6 percent after U.S. factory orders declined and jobless claims surged. Rio Tinto Group fell 4.7 percent as commodity prices headed for their biggest weekly decline in 50 years. Orix Corp., Japan's biggest leasing company, lost 12 percent on concern it will face difficulty financing its debt as three-month lending rates climbed to their highest since at least January.

``We know that there's a financial crisis, and now the question is are we going to have an economic correction or crisis,'' said Masayuki Kubota, a senior fund manager at Daiwa SB Investments Ltd. in Tokyo, who helps oversee $1.7 billion. ``If it does turn into a crisis, there is a lot of downside for equity markets.''

The MSCI Asia Pacific Index declined 1.8 percent to 105.33 as of 2:41 p.m. in Tokyo, set to close at its lowest since August 2005. The measure is poised to drop 7.4 percent this week, led by commodity producers, after Congress voted down the first passage of the bailout plan.

That would be the biggest weekly decline since the five days to Aug. 17, 2007, when credit markets first seized up as rising U.S. mortgage defaults prompted banks to rein in lending. Shares included in MSCI's Asian gauge trade at 12.2 times estimated earnings, compared with 13.2 times for Standard & Poor's 500 Index and 9.6 times for Europe's Dow Jones Stoxx 600 Index.

Nikkei, Hang Seng

All benchmark indexes open for trading in the region dropped today apart from Taiwan. Markets in China, South Korea, Indonesia and Pakistan are shut for holidays.

Japan's Nikkei 225 Stock Average fell 1.4 percent to 11,000.25. The measure has lost 7.5 percent this week, the most since August 2007, while the Hang Seng Index dropped 4.6 percent, capping a five-week, 16 percent decline.

Futures on the S&P 500 gained 0.5 percent. The S&P 500 lost 4 percent yesterday. Caterpillar Inc. slumped 8.3 percent as lending rates soared and General Electric Co. plunged 9.6 percent after selling shares at a discount.

A surge in market volatility and a contraction in credit led to the failures last month of Lehman Brothers Holdings Inc. and Washington Mutual Inc., the sale of Merrill Lynch & Co. to Bank of America Corp., and the nationalization of American International Group Inc.

Toyota lost 6 percent to 4,050 yen. The carmaker offered no- interest loans on 11 U.S. models after sales in the country plummeted the most since 1987. Reliance Industries Ltd., India's most valuable company, dropped 3.5 percent to 1,838.50 rupees.

U.S. Unemployment

The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said, after predicting a moderate contraction in July.

Orders to U.S. factories fell 4 percent in August, the Commerce Department said, more than economists had forecast. The number of people collecting jobless benefits rose to 3.59 million in the week ended Sept. 20, the most since 2003. Economists estimate a U.S. report being released today will show that payrolls dropped the most in five years in September and the unemployment rate remained at 6.1 percent.

``Investors' focus is shifting from a financial crisis to a worsening economy with a slowdown in the U.S. spreading among other nations,'' said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $61 billion in Tokyo. ``Their views on the fundamentals of the global economy are radically changing.''

Rio Tinto slid 3.1 percent to A$88.45. Newcrest Mining Ltd., Australia's largest gold producer, fell 5.1 percent to A$27.37. Mitsubishi Corp., which generates more than half of its profit from commodities dealing, lost 6.6 percent to 1,910 yen.

Crude Oil

Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, have fallen 9.9 percent this week, the largest drop since at least 1956 on concern that demand will weaken as global economic growth slows. Crude oil has lost 13 percent to recently trade at $93.35 a barrel, set for its worst weekly performance since December 2004.

Orix, which has debt equal to three times its equity, slumped 12 percent to 10,600 yen. China Construction Bank Corp., the nation's second-biggest lender, lost 3 percent to HK$4.87.

Banks in Singapore are charging each other three-month U.S. dollar loans at 4.27 percent, the highest since Jan. 11. Hong Kong's interbank offered rate for similar-term loans in the city's currency, known as Hibor, climbed to 3.81 percent, the highest since Dec. 10.

Funding

Difficulty borrowing money is crippling the ability of some companies to fund their everyday operations. GE, once the world's largest company by market value, was forced to raise $12 billion through a share sale to keep its business going. The move by GE, which carries debt at four times its equity, highlights the danger leveraged companies face as funding dries up.

Fast Retailing Co., the operator of Japan's Uniqlo casual clothing store chain, rallied 14 percent to 12,450 yen, the biggest percentage move in MSCI's Asian gauge. September sales at stores open at least 12 months jumped 21 percent, the company said yesterday.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.