* Financial sector fears add to Asia market woes
* Japan megabanks have $44 bln in Fannie/Freddie
debt-report
* Risk aversion is on the rise
(Updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, July 15 (Reuters) - Asian stocks fell to a
two-year low on Tuesday as investor confidence waned in the
region's financial sector, which faces high inflation, a
stricter lending environment and massive volatility from
overseas markets.
The wave of selling was likely also to hit European stocks,
which are expected broadly to fall 1 percent, according to
financial bookmakers.
The U.S. dollar fell toward a record low against the euro
as traders worried about the stability of the financial system
despite the U.S. government's announcement on Sunday of an
emergency plan to support two struggling top mortgage lenders.
Megabanks in Japan, Asia's largest economy, had roughly 4.7
trillion yen ($44.3 billion) in debt issued by U.S. mortgage
lenders Fannie Mae and Freddie Mac, whose stock plummeted last
week on fears about solvency, an article said on Tuesday,
adding to worsening sentiment on equities. []
Investors' willingness to take risks was further drained by
a shift in focus from lending institutions that are believed to
be too big to be allowed to fail, to ones that are small enough
to collapse.
Add to all that high oil prices and investors have
increasingly abandoned stocks for the relative safety of assets
like Japanese government bonds, whose benchmark 10-year yield
hit a 2-month low.
"Sentiment is really fragile," said Louis Wong, research
director with Phillip Securities in Hong Kong. "Investors are
worried that there might be more bank failures, especially
small banks in the United States. Whenever you have this kind
of financial turmoil, banking stocks get hit."
Japan's Nikkei share average <> ended down 2 percent
at the lowest since April 1.
Shares in the country's biggest bank, Mitsubishi UFJ
Financial Group <8306.T>, slid 5.3 percent and No. 2 Mizuho
Financial Group <8411.T> declined 5 percent after the Nikkei
business daily said those banks had some of the biggest
exposure in Japan to debt issued by Fannie Mae <FNM.N> and
Freddie Mac <FRE.N>.
BETTING AGAINST BANKS
Sentiment and risk apparently mattered more to investors
than the likelihood of a company's bottom line suffering from
direct exposure to Fannie and Freddie debt securities.
Concern about the exposure was likely overdone, said Koichi
Ogawa, chief portfolio manager at Daiwa SB Investments in
Tokyo. "There is no problem with Fannie and Freddie debt. You
are pretty much at the level of guarantee by the U.S.
government."
Still, the MSCI pan-Asia equity index <.MIAS00000PUS>
dropped 2.5 percent to the lowest since August 2006.
Hong Kong's Hang Seng <> sank 3.2 percent, with HSBC
<HSBA.L><0005.HK>, Europe's largest lender, one of the heaviest
drags on the index for the second consecutive day.
Chinese banks, such as China Construction Bank <0939.HK>,
whose shares fell 4.5 percent and Industrial & Commercial Bank
of China <1398.HK>, down 4.9 percent, were among the biggest
percentage losers despite having been favourites a week ago.
"With inflation rising, you would expect central banks to
raise rates, which will flatten out the yield curve -- and that
means banks will not be so profitable here," said Mixo Das,
equity strategist with Lehman Brothers in Hong Kong.
Besides the dramatic exit from Fannie and Freddie shares in
the last week, investors on Friday witnessed the fall of
IndyMac Bancorp <IMB.N>, the third-largest bank failure in U.S.
history.
PUMP UP THE VOLATILITY
Volatility, often the nemesis of portfolio managers, has
been on the rise in the last few months, and indications of
risk-taking have deteriorated.
Wall Street's so-called gauge of fear, the Chicago Board
Options Exchange Volatility index <.VIX>, climbed to a
four-month high on Monday, up for the fourth straight day.
Results forthcoming from JPMorgan Chase & Co <JPM.N>,
Merrill Lynch & Co Inc <MER.N> and Bank of America Corp
<BAC.N>, should offer some indication on what extent credit
stress fallout is worsening.
In such a risk-averse environment, government bonds have
thrived. The benchmark Japanese 10-year yield <JP10YTN=JBTC>,
which moves in the opposite direction of the price, was down
three basis points at 1.55 percent, after hitting a three-month
low of 1.53 percent.
The yield has fallen more than 35 basis points since it
struck an 11-month peak of 1.895 percent in mid-June.
Many traders in the foreign exchange market were awaiting a
speech from Federal Reserve Chairman Ben Bernanke later in the
day, with some dealers pointing to instability in the financial
sector as a reason for persistent dollar weakness.
The euro <EUR=> inched up 0.2 percent from late U.S. trade
to $1.5941, not far from the record high of $1.6020 hit in
April.
The dollar fell 0.3 percent to 105.82 yen <JPY=>.
Gold prices were relatively unchanged at $971.50 an ounce
<XAU=>, but within sight of its strongest level in almost four
months as surging oil prices and financial market jitters
boosted the metal's safe-haven appeal.
Oil <CLc1> eased 7 cents to $145.11 a barrel, but close
last week's record above $147, as dealers weighed the impact of
high oil prices on global demand against fresh threats of
supply disruptions in Nigeria, Brazil and Iran.
(Additional reporting by Aiko Hayashi and David Dolan in
Tokyo; Editing by Louise Heavens)
