* Stagflation fears override recovery hopes
* Crude oil surges to fresh record above $144
* Wall St joins Asia stocks in bear market
(Updates prices, adds quote, comments)
By Kevin Plumberg
HONG KONG, July 3 (Reuters) - Asian stocks fell on Thursday
on signs of further deterioration in the U.S. economy, a fresh
record high in oil prices, and heightened fears that
stagflation will continue to damage company earnings and
consumer spending.
Japan's Nikkei share index <> slipped for the 11th
consecutive day, on track for the longest losing streak in a
half century, after the Dow Jones industrial average <>
sank into bear market territory overnight, closing more than 20
percent below its October peak. []
The dollar fell to a two-month low against the euro <EUR=>
after a report on Wednesday showed U.S. private employers cut
the most jobs in nearly six years.
The euro, by contrast, was supported by expectations that
the European Central Bank will later in the day raise its
benchmark interest rate for the first time in a year.
[]
Investors will focus on whether ECB policymakers will hint
that borrowing costs will have to rise further to fight
inflation despite a global economy that is growing below its
long-term trend. []
Weakness was by no means unique to Japanese stocks in the
midst of a toxic mix of rising inflation and slowing growth
known as stagflation.
The MSCI index of Asia-Pacific shares <.MSCIAPJ> traded
outside of Japan fell 1.2 percent to the lowest since a blowup
in the U.S. subprime mortgage sector turned into a global
credit crisis 10 months ago.
"What seems to be happening is we're seeing outflows from
emerging market equities and outflows from sovereign bonds,
which is not a surprise given the inflation backdrop," said
Dwyfor Evans, strategist with State Street Global Markets in
Hong Kong, which tracks cross-border capital flows.
"People are moving toward a more defensive, safer haven
strategy when it comes to holding equities," he said.
The euro zone, Britain, New Zealand and Japan have actually
received near record amounts of equity capital in the last
several weeks as investors repatriate their money or find
relatively stable markets amid uncertainty about the global
outlook.
WINDOW CLOSES FOR STOCKS
The benchmark MSCI pan-Asia index was down 0.6 percent
<.MIAS0000PUS>. It has fallen about 22 percent since hitting an
all-time high in November; a drop of 20 percent or more from
market highs usually is defined as a bear market.
Hong Kong's Hang Seng index <> fell 0.9 percent, with
Ping An Insurance <2318.HK><601318.SS> one of the biggest drags
on the market as investors dumped the stock on rumours of a tax
probe, despite assurances from the company.
Australia's S&P/ASX 200 index <> fell more than 2
percent to a 21-month low, weighed down by the mining sector on
concerns that slowing global economic growth will hurt demand
for commodities and following a slump in coal prices.
BHP Billiton Ltd <BHP.AX>, the world's top miner and its
main rival and takeover target, Rio Tinto Ltd <RIO.AX>, both
lost around 6 percent.
"The window of opportunity for equities appears to have
passed, as rising inflation and inflation expectations,
aggressive central bank rhetoric and more downside to
second-half growth as the tax rebates effect fades, weighed
heavily on equity markets," said JPMorgan asset allocation
strategists in a note to clients.
They recommended reducing overall exposure to global
equities but moving to a bet that U.S. equities will outperform
credit markets.
Last month world equity markets lost $3 trillion in value,
according to Standard and Poor's, as hopes for a global
economic recovery in the latter half of the year faded on
concerns central banks around the world would have to tighten
monetary conditions sooner rather than later because of price
pressures.
Trying to trounce a potential source of inflation, China
tightened its capital controls on Wednesday in a move aimed at
deterring speculative inflows of foreign money betting the yuan
will keep strengthening. []
The euro slipped 0.1 percent to $1.5865 after earlier
rising as high as $1.5893, the highest since late April and
edging closer to an all-time peak of $1.6020 that was also hit
in April. The dollar edged up to 106.04 yen <JPY=>, up 0.2
percent.
Markets are also awaiting U.S. non-farm payroll data later
in the day. A bigger-than-expected contraction in the labour
market, which would be the fifth straight month the world's
largest economy shed jobs, will almost certainly revive fears
of a U.S. recession.
U.S. crude prices continued their relentless rise, climbing
to a record $144.44 a barrel <CLc1> in early Asian trade, up 50
percent this year as tensions grew between Israel and the
world's fourth largest oil exporter Iran and supply fears
boiled over.
Gold, often used by investors as a hedge against rising
inflation, slipped 0.1 percent to $942.80 <XAU=> an ounce after
hitting a two-month high of $944.35 on Wednesday.
Japanese government bonds edged lower as caution prevailed
before a key auction.
Bond dealers are bracing for a 1.9 trillion yen ($17.95
billion) auction of 10-year paper, with results due at 0345
GMT.
The benchmark 10-year yield <JP10YTN=JBTC> rose 2.5 basis
points to 1.68 percent.
