* MSCI Asia ex-Japan falls to 2-year low
* Japan, South Korea stocks down 5-6 percent
* 10-yr U.S. Treasury yield lowest in 6 months
* Crude falls 4 pct to below $92 as risky assets dumped
(Recasts, updates prices, adds quote)
By Kevin Plumberg
HONG KONG, Sept 16 (Reuters) - Asian stocks dropped on
Tuesday, with markets in Japan and Hong Kong down 5 percent, on
concerns Wall Street's upheaval will cause lasting damage to
the global economy, sending investors fleeing to government
debt.
The yield on the 10-year U.S. Treasury note dropped to a
six-month low with increased speculation about an aggressive
U.S. Federal Reserve interest rate cut, a day after China's
central bank surprised markets with its first rate reduction
since early 2002 to stimulate growth. Japanese government bond
futures jumped by their daily limit of three full basis points.
Asia-Pacific shares outside Japan hit a 2-year low after
one of the most explosive 48-hour periods in the finance world
that accelerated a sweeping move out of risky assets. Investors
bailed out of commodity-related funds, knocking oil prices
below $92 a barrel and weighing broadly on metals prices.
Lehman Brothers <LEH.P> filed for bankruptcy, Bank of
America agreed to buy Merrill Lynch, the Fed expanded its
emergency liquidity provisions and American International Group
(AIG) <AIG.N>, once the world's biggest insurer, was seriously
constrained by short-term funding trouble. []
"There is no hiding for anyone here. The global money pool
-- we all either have to chip into it or get some money out of
it, and we're all affected by it," said Credit Suisse chief
strategist Adnan Kucukalic in Sydney.
Tokyo's Nikkei share average <> dropped 5.1 percent to
its lowest in three years.
Markets in Japan, South Korea, China and Hong Kong had been
closed on Monday, and quickly followed the sell-off in New
York, where the Dow Jones industrial average <> slid more
than 500 points, or 4.4 percent, in its biggest one-day point
drop since re-opening after the September 2001 attacks.
The financial sector was hit by a wave of selling. Shares
of Japan's top lender Mitsubishi UFJ Financial Group <8306.T>
fell 8.2 percent, Macquarie Group <MQG.AX> dropped 7.7 percent
and led the benchmark Australian index <> down 2.4
percent.
An MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> was down 4.4 percent to the lowest since August
2006, and has now slumped 44 percent from a peak last October.
South Korea's KOSPI stock index <> plunged 5.4 percent
to its lowest since March 2007, and Hong Kong's Hang Seng
<> was down 5.7 percent to a near two-year low.
MORE NEAR-TERM PAIN
The indiscriminate selling in risky assets has hurt
emerging market equities especially hard. Valuations of
emerging market stocks are currently 9.2 times expected
earnings 12 months from now, compared with a low of 10.2 times
reached during the Asian financial crisis about a decade ago.
Adrian Mowat, JPMorgan's emerging markets and Asia-Pacific
equity strategist, said in a note that inflation in developed
and developing economies has peaked, which should promote
pro-growth policies among central banks. "We agree that
emerging market valuations are not at distressed levels based
on relative valuation. But these higher growth and improved
fundamentals argue for a premium valuation of emerging market
equities."
However, developments were fluid and visibility was low.
AIG, whose stock plummeted 61 percent overnight, secured a
$20 billion lifeline brokered by New York State officials on
Monday, but Standard & Poor's cut its long-term counterparty
rating on the insurer. Moody's also downgraded AIG's senior
unsecured debt rating.
"The U.S. financial system is never going to be the same.
Events of the last 24 hours are positive, but there is likely
more pain on the near-term horizon," said Donald Straszheim,
vice chairman of Roth Capital Partners in Los Angeles, in a
note.
The U.S. dollar slipped to 104.31 yen after ending
overnight in New York around 104.54 yen. It had its biggest
single-day decline against the yen on Monday in nine years.
The euro edged down to $1.4227 after ending at $1.4263 on
Monday, and the 15-nation currency fell to 148.45 yen from
149.10 yen <EURJPY=> on Monday.
The U.S. dollar was dumped on Monday as markets quickly
priced in an 88 percent chance <FEDWATCH> of a
quarter-percentage point rate cut by the Fed after a meeting
later and some analysts speculated about a more aggressive 50
basis point cut.
Japanese and U.S. government debt yields, which move in the
opposite direction to prices, dropped as investors sought
safety.
The yield on the 10-year Japanese government bond
<JP10YT=JBTC> in the cash market fell to a 5-month low of 1.375
percent before recovering a bit to 1.42 percent.
The yield on the policy-sensitive U.S. two-year Treasury
note <US2YT=RR> fell to 1.69 percent to the lowest since
mid-April. The 10-year yield <US10YT=RR> slipped to 3.37
percent from 3.41 percent late on Monday in New York.
Oil <CLc1> dropped $3.92 a barrel to $91.79, its lowest
since mid-February. Crude was thrown into the pile of assets
being liquidated by investors around the world to fund losing
bets and to cut their exposure to risk.
Even gold <XAU=>, a traditional safe-haven in times of
financial stress, fell more than 1 percent as investors treated
it as another risky commodity.
(Additional reporting by Sonali Paul in MELBOURNE; Editing by
Lincoln Feast)
