Asian stocks tumble amid risk aversion

FE Team | Published: July 28, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Raphael Minder in Hong Kong, David Turner in Tokyo and Geoff Dyer in Shanghai, FT Syndication Service
Asian stock markets Friday joined a global tumble amid a flight away from risky credits and fears about banks' growing exposure to leveraged buy-out debts.
In Japan, the benchmark Nikkei average dropped 2.4 per cent to its lowest level in three months, also dogged by domestic political uncertainty, while the yen hit a three-month high against the dollar as carry trades were unwound.
The downturn in the region was led by Taiwan and Korea, whose leading indices each fell just over four per cent.
Thailand and Indonesia fared little better, with drops of 3.4 per cent and 3.3 per cent respectively. South Korean stocks suffered their biggest one-day drop in three years and Taiwan's fall was the sharpest in over a year.
While most Asian economies are expected to maintain the strong growth that has helped many of the region's markets reach record highs this year, pundits warned of vulnerability to a sharp downturn in the US because of the region's reliance on America as an export market.
Garry Evans, Asia-Pacific equities strategist with HSBC, said that it would "probably be wrong to panic" at this stage given the healthy economic fundamentals in Asia and the fact that relatively low trading volumes over the summer tended to exaggerate market movements.
But he added: "Although there has been some evidence of decoupling (with the US), we are going to recouple if there is going to be a significant slowdown in the US."
Meanwhile, there was further evidence Friday that some Asian currencies were starting to suffer from an unwinding of the yen carry trade that has helped them outperform in recent months. The Indian rupee had its biggest fall in six weeks and the Philippine peso suffered its biggest weekly drop in six and a half years, according to Bloomberg.
Stephen Koukoulas, global strategist at brokerage TD Securities, said: "The repricing of risk has caused some people to think about the carry trade and the fact that there has to be some trade-off in getting such very high yieldsâ€¦ The question is now whether this is one of those quick-and-dirty cleansing episodes or something more. The fundamental picture is still pretty good in most of these markets but I think the risks are tilted towards this being a bigger problem than just a one-week wonder."
The Australian benchmark stock index lost 2.8 per cent, after climbing to a record earlier this month. Australia has been one of the main beneficiaries of the global carry trade as its central bank has gradually raised interest rates to stem inflation.
MSCI's index of Asia Pacific stocks excluding Japan fell 3.4 per cent.
Only the Shanghai Composite avoided a steep decline, ending down 0.03 per cent at 4,345 points after falling as much as 1.8 per cent in early trade. The index closed at a record high on Thursday and has risen 11 per cent over the past week.
Peng Yunliang, analyst at Shanghai Securities, said that the Chinese market had been supported in recent days by the strong earnings performance from listed Chinese companies. "This is the reason why the Chinese market has performed well while other markets have been trending down," he said. The main risk to the market was that the government would take new measures to prevent speculation on the market, he said, although there were few signs that such moves were being planned.
Meanwhile, jitters in Japan were compounded by domestic political uncertainty ahead of elections on Sunday. Many analysts think the ruling coalition will lose its parliamentary majority in the upper house, though they disagree on the likely extent of the rout. Shoji Hirakawa, equity strategist at UBS in Tokyo, said that should the coalition led by the Liberal Democratic party lose its majority only narrowly, share prices could rebound on expectations the LDP would shelve plans within the next few years to raise consumption tax, boosting household spending, increasing corporate earnings.
But if the ruling coalition lost by a wide margin, share prices would fall on fears "there might be a little bit of a problem passing bills".
The stock market losses in Asia followed a rout in New York overnight that left the S&P 500 index down 2.3 per cent as investors sought the safety of government debt. The Nasdaq Composite fell 1.8 per cent while the Dow Jones Industrial Average was 2.3 per cent.
Concerns about the possibility of a credit contraction were exacerbated this week when banks gave up attempts to sell to investors $20bn of debt for the leveraged buy-outs of Chrysler and Alliance Boots, the UK retailer.
The worries about leverage lending commitments reinforced anxieties about bank stocks triggered by diminishing investor appetite for complex debt securities and problems in the US mortgage market.
Housing starts in the US fell 6.6 per cent in June, the government said on Thursday, and several homebuilders reported second-quarter losses.