Economy fears dog Asia stocks

By Eric Burroughs

HONG KONG (Reuters) - Asian stock markets and oil prices retreated on Tuesday while the yen pushed higher as a souring economic outlook cooled investor hopes sparked by China's massive stimulus plan.

Stocks pulled back after shares of General Motors (GM.N: Quote, Profile, Research, Stock Buzz) sank to a 62-year low and brokerages forecast that Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) will post its first-ever quarterly loss, stirring worries about the earnings damage to come as the global economy faces a recession.

The bankruptcy of No. 2 U.S. electronics retailer Circuit City CCTYQ.PK also cast a shadow over equities.

European shares were set to drop about 1.5 percent, according to financial bookmakers.

China's nearly $600 billion package, along with expectations U.S. President-elect Barack Obama will push for more fiscal spending to revive the economy, spurred investor risk-taking on Monday.

"We're still getting pretty weak economic data, and I don't think that's going to change anytime soon," said Sean Darby, chief Asia strategist at Nomura in Hong Kong.

Darby said that investor conviction remains low and many market players were not seeing strong reasons to pick up battered shares yet.

The MSCI Asia ex-Japan .MIAPJ0000PUS fell 3 percent but is still up about 24 percent from the low struck in October when investors dumped assets across the board to raise cash, hitting higher-yielding currencies and commodities as well.

GLOOMY DATA

Tuesday offered more gloomy economic data, with confidence among Japanese service sector workers hitting a record low in October and South Korean exports sliding 26 percent during the first part of November from a year earlier.

Japan's Nikkei average .N225 shed 3 percent to 8,809.30 after having jumped nearly 6 percent the previous day. Automakers and exporters led the decline.

The Shanghai Composite Index .SSEC and Hong Kong's Hang Seng .HSI held up better than other markets, losing 0.6 percent.

Construction and infrastructure-related companies climbed for a second day on hopes that China's big spending targetting infrastructure would provide a boon of new orders.

In commodities, U.S. crude oil prices were down $1.87 a barrel to $60.54 on worries about global demand, falling back near a 1-1/2-year low struck last week.

The yen edged up slightly, gaining as market players cut positions favoring higher-yielding currencies that tend to perform better when stocks rise and investor appetite for risk improves.

The dollar dipped 0.2 percent from late U.S. trade to 97.85 yen, while the euro was down 0.4 percent at 124.50 yen. The euro slipped 0.2 percent to $1.2730.

Dollar money market trading was quiet due to U.S. bond markets being closed for the Veterans Day holiday, though stock markets will be open as usual.

Three-month dollar rates in Singapore dipped to 2.2 percent to 2.75 percent from 2.3 percent to 3.0 percent.

With year-end approaching, market players said they were bracing for more hedge fund selling to raise cash holdings and prepare for investor redemptions.

The sharp sell-off across financial markets in October was driven in part by funds selling assets to boost cash holdings, especially with money markets remaining under such severe stress.

Highlighting the cross-asset liquidation in October, data on Tuesday showed foreign investors dumped a record 2.7 trillion yen ($27.6 billion) of Japanese bonds in addition to 1.32 trillion yen ($13.5 billion) of stocks last month.

"We are in a period in which foreign investors, including hedge funds, prepare for their year-end and raise their cash holdings," said Minoru Shioiri, chief manager of forex trading at Mitsubishi UFJ Securities in Tokyo.

"The yen could rise further if there are more funds rushing to liquidate positions, but the peak may have passed for now."

Japanese government bonds jumped on the drop in stocks and a solid auction of five-year notes.

JGB futures jumped 0.89 point to 138.09, while the gains pushed the benchmark 10-year Japanese government bond yield down 4 basis points to 1.485 percent.