* Source says Bank of America needs $34 bln in capital
* Stress test uncertainty lifts yen, U.S. dollar
* VIX volatility index at lowest since late Sept 2008
* Risk rally on pause but may not be over
By Kevin Plumberg and Dan Burns
HONG KONG, May 6 (Reuters) - Stocks slipped and the yen
rose on Wednesday after news Bank of America needs $34 billion
in extra capital startled investors who had grown more
comfortable with risk ahead of official results of stress tests
on U.S. banks due on Thursday.
U.S. S&P 500 futures <SPc1> were down 1 percent, indicating
a lower market open later in the day on Wall Street, after a
source familiar with the government tests on 19 banks told
Reuters that Bank of America <BAC.N> required additional
capital worth nearly half its market cap of $69.4 billion.
[]
Major European stock markets were expected to open as much
as 0.5 percent lower, according to financial bookmakers, in the
wake of the Bank of America headlines.
The yen strengthened across the board as dealers sought its
relative safety, knocking the Australian dollar down 1.3
percent against the yen <AUDJPY=R> despite
stronger-than-expected Australian retail sales numbers.
"This could put a dent in the rally we've seen," said Jan
Lambregts, head of Asia research at Rabobank in Hong Kong.
"Definitely we'll have a breather until we get these (stress
test) results. Perhaps there are a few surprises in there,"
Lambregts said.
Still, the fallout from the Bank of America news was
limited by optimism about the global economy, particularly
after several Federal Reserve officials this week, including
Ben Bernanke, said the U.S. recession should end this year.
The MSCI index of Asia Pacific stocks <.MIAPJ0000PUS>
outside Japan fell 0.4 percent, after hitting a seven-month
high on Tuesday. Cyclical sectors, such as energy and materials
in addition to financials led the index lower.
The all-country world index <.MIWD00000PUS> climbed to a
four-month high on Tuesday.
Japan's markets were closed for a holiday.
Hong Kong's Hang Seng index <> was up 0.2 percent in
choppy trading. A 2.4 percent rise in HSBC stock <0005.HK> was
enough to offset weakness in index heavyweight China Mobile
<0941.HK>.
Bank of America has been at the top of the list of banks
believed to need more cash to survive credit losses. The $34
billion number caught many dealers off guard because it triples
the previously published reports of the firm's capital needs.
Taiwan's stock market outperformed the region, with its
benchmark <> rising 2.3 percent and extending last week's
rally on hopes of closer investment ties with China.
OF RISK AND MACHINE GUNS
Investor willingness to take risks in search for higher
returns has been steadily increasing over the last few months
in response to evidence around the world the global economic
downturn is easing. Signs that China's manufacturing sector is
revving up have spurred hopes of a revival among Asia's other
exporters, and even the downturn in the U.S. housing market may
have stabilised.
Greater acceptance of risk has prompted a rally in
equities, commodities, emerging market debt and high-yielding
currencies. Uncertainty over the stress test results may put
the climb on pause, but was unlikely to reverse it, analysts
said.
"In the short term, fundamentally, a correction is overdue
and U.S. bank stress test results could well become a trigger
as they will reveal capital needs without any real immediate
remedy," said Dariusz Kowalczyk, chief investment strategist
with SJS Markets in Hong Kong.
"However, market positioning is likely to trump
fundamentals, and it seems real money is coming out of the
trenches," he said in a note.
The U.S. dollar was down about 0.7 percent against the yen
to 98.22 yen <JPY=>, but was higher against the euro and
emerging Asian currencies, benefitting from a rush to
liquidity.
The euro was down around 0.3 percent to $1.3265 <EUR=>,
ahead of a European Central Bank policy meeting on Thursday at
which the ECB is expected to cut rates to 1 percent.
High-grade credit spreads in Asia widened slightly on the
Bank of America news, though they remained near the tightest
levels since October, the Asia iTraxx investment-grade index
<0#ITAIGMPBMK=> showed.
Indeed, though traders were having to deal with leaks on
the bank stress test results in the near term, investors with a
longer-time horizon were probably comforted by signs the
financial crisis was easing.
For example, the VIX index <.VIX>, a standard gauge of
financial market volatility, fell on Tuesday to its lowest
since late September. And 3-month LIBOR <USD3MFSR=> fell below
1 percent for the first time after spiking to as high as 4.8
percent in the wake of the collapse of Lehman Brothers last
year.
U.S. crude for June delivery <CLc1> was largely unchanged
at around $53.80 a barrel after rising to a high for the year
overnight of $54.83.
(Editing by Tomasz Janowski)
