* Investors flee for safety after Lehman files for Chapter
11
* High-grade debt, gold, yen in demand on bank industry
storm
* Focus turns to Fed policy decision on Tuesday
(Updates prices, details)
By Kevin Plumberg
HONG KONG, Sept 15 (Reuters) - Stocks and the U.S. dollar
fell sharply on Monday after Lehman Brothers filed for
bankruptcy protection, sending safe-haven Treasury debt and
gold prices soaring as the financial system bent under severe
pressure.
U.S. stock market futures <SPc2> <DJc2> <NDc2> were down
around 3 percent, pointing to sharply lower open, while major
European markets were set for falls of between 3.5 to 4 percent
<STXEc1> <FDXc1> <FCEc1>.
Rapid-fire developments on Wall Street, only a week after
the U.S. government bailed out Fannie Mae and Freddie Mac, left
some analysts literally speechless and sent shockwaves through
almost every asset class. The dollar plunged 1.9 percent
against the yen, on track for its biggest decline since
February 2007, as investors' willingness to take risks
evaporated. []
"It's a pure flight to quality right now," said Adam
Donaldson, head debt strategist at Australia's Commonwealth
Bank.
"The big concern is how Lehman and other banks unwind their
credit default contracts," he added. "Nobody knows how that
will play out."
The price of insurance against default on debt soared,
pushing up the iTRAXX Asia ex Japan high-yield index
<ITAHY5Y=IE>, a measure of credit market stress, to match
record highs reached in the runup to Bear Stearns' collapse in
March.
While a lack of confidence felled Lehman, a lack of
short-term funding was hurting one of the world's largest
insurers American International Group Inc <AIG.N>. The firm was
asking the Federal Reserve for a bridge loan of $40 billion,
according to the New York Times, an unprecedented move that
further battered the dollar and knocked down two-year U.S.
government debt yields to a five-month low.
For more stories on Lehman, click on []
ASIAN STOCKS TUMBLE
Stock markets in Australia, Singapore and Taiwan all
dropped 3 to 4 percent, Indian stocks <> fell 5 percent.
Holidays in most major Asian markets kept volume thin
though price action belied a desire to seek safety first and
ask questions later.
"The exact ramifications of the liquidation process and the
unwinding of positions pertaining to the Lehman situation
remain unclear. Hence, over the next 48 hours at least,
financial markets are likely to be volatile and tense," said
economists with United Overseas Bank in Singapore in a note.
The Swiss franc and yen, currencies associated with
stability in times of duress, strengthened, especially against
the dollar, which reeled as some in the market speculated the
Federal Reserve may have to cut interest rates on Tuesday to
shore up the economy from financial fallout.
The U.S. dollar dropped 1.9 percent against the yen at
105.88 yen <JPY=> and was off 1.2 percent against the Swiss
franc to 1.1165 francs <CHF=>.
The euro rose by more than a cent against the dollar to
$1.4380, up 1.1 percent from late Friday in New York.
In the spot market, gold rose 2 percent to $778.85 an ounce
<XAU=>.
FED SUPPLIES LIQUIDITY, NOT CONFIDENCE
The Fed on Monday said it would begin accepting equities as
collateral for emergency loans for the first time as it tried
to ease the spiralling crisis. The steps would likely help
surviving financial institutions to find cash but may not do
much to boost global confidence in the U.S. financial system.
"The mere fact that they are forced to do this -- and they
may still yet do some more -- indicates the breadth and depth
of the trouble that the system is in," said V. Anantha
Nageswaran, head of investment research, Asia-Pacific with Bank
Julius Baer in Singapore.
In addition, 10 of the world's biggest banks agreed to
establish a $70 billion borrowing facility to bolster
liquidity.
U.S. Treasury yields, which move in the opposite direction
of prices, fell sharply in early Asian trade on Monday and
3-month eurodollar futures <O#ED:> surged as dealers priced in
the possibility of lower Federal Reserve benchmark interest
rates.
The yield on the policy-sensitive two-year Treasury note
<US2YT=RR> hit a five-month low of 1.90 percent. The 10-year
yield <US10YT=RR> was also at the lowest since April, at 3.52
percent compared with 3.72 percent late on Friday.
Bank of America <BAC.N> said it would acquire Merrill Lynch
& Co Inc <MER.N> for $50 billion in yet another development
that realigned Wall Street. The deal was significant not just
because of its price but it showed how the private sector will
have to sort itself out and not depend on backing of the U.S.
government.
"For many, but not all, this is an impossible lesson to
learn in the middle of the worst financial storm since the
Great Depression," said Alan Ruskin, chief international
strategist with RBS Greenwich in Greenwich, Connecticut.
Australia's benchmark S&P/ASX 200 index <> fell 1.8
percent, weighed by shares of the country's top banks such as
Commonwealth Bank of Australia <CBA.AX> and Macquarie Group Ltd
<MQG.AX>.
Taiwan's TAIEX <>, the only stock market open in north
Asia, dropped 4.1 percent to the lowest since November 2005.
Singapore's Straits Times index <.FTSTI> was at the lowest
since September 2006, down 2.9 percent.
"The financial sector in the region is very volatile now
and we don't expect investors' confidence to recover quickly in
just a few days or one week," said Alex Huang, a vice president
at Taiwan's Mega International Securities.
While the fate of the U.S. financial system loomed in
investors' minds around the world, initial reports that
Hurricane Ike had not severely damaged infrastructure in Texas
knocked benchmark oil prices fall to a six-month low below $99
a barrel. []
Oil <CLc1> fell $2.10 to $99.08 a barrel after falling as
low as $98.46 -- the lowest since February 26 -- adding to a
steady downward trend in prices since mid-July's peak of over
$147 a barrel as evidence mounts that high energy costs and a
weakening economy are cutting into fuel consumption.
(Additional reporting by Baker Li in TAIPEI and Wayne Cole in
SYDNEY; Editing by Lincoln Feast)
