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* Nikkei at 3-year closing low
* Funding squeeze pushes up dollar
* Commodity prices tumble on view of slower global growth
* Bailout vote uncertain in House of Representatives
(Updates prices, adds European outlook)
By Kevin Plumberg
HONG KONG, Oct 3 (Reuters) - Asian stocks fell and gold
prices rose on Friday on fears a $700 billion financial rescue
bill still needing final U.S. congressional approval may not be
enough to keep the global economy from falling into recession.
The Senate has passed the measure, but political
brinkmanship continued in Washington after the House of
Representatives shook markets earlier this week by rejecting
the bill, and passage on Friday was not guaranteed.
European stock market futures <STXEc1> pointed to a
slightly higher open, ahead of the vote. A second rejection by
the House would likely kill the plan and probably unleash panic
selling of global equities, blow out credit spreads and drag
government bond yields lower.
The flow of credit remained practically frozen in money
markets, leading to a scramble for U.S. dollar funding that has
the currency on track for its biggest weekly gain in 16 years
against a basket of major currencies.
Raw materials prices tumbled on expectations that demand
from big consumers such as the United States and China will
fall, while a preference for stability pushed up gold by more
than 1 percent. Copper prices <MCU3> were on track for a record
decline this week, down around 14 percent, and oil was down
12.7 percent for the week, its biggest 5-day drop since
December 2004.
"Japan's economy isn't good, America isn't good, Europe
isn't good. The next to be hit may be emerging economies -- and
this will just increase worries for an export-dependent economy
like Japan's," said Hiroaki Osakabe, a fund manager at Chibagin
Asset Management in Tokyo.
Japan's Nikkei share average finished down 1.9 percent --
its worst close in three years -- with shares of car makers
Honda Motor Co <7267.T> and Toyota Motor Corp <7203.T> among
the heaviest drags following a big drop in U.S. sales for
September.
The MSCI index of Asia-Pacific stocks outside Japan slipped
0.8 percent <.MIAPJ0000PUS> and lost 6.9 percent on the week.
Regional equity markets have outperformed the All-Country World
Index, which sank 8.8 percent this week to the lowest in three
years <.MIWD00000PUS>.
Hong Kong's Hang Seng index <> dropped 2.6 percent,
dragged lower by bank stocks as tight lending conditions spread
fears that one of Asia's main financial hubs would be hit hard.
STRESS AND DISARRAY
Credit markets in the Asia-Pacific region reflected stress
and disarray as longer-term interbank rates continued to climb
and squeeze the financial sector.
The bid on the iTRAXX Asia ex-Japan 5-year credit default
index <ITAHY5Y=IE>, essentially protection against default,
rose about 20 basis points to 655 bps. However, the offer was
700, signalling thin trading and a struggle for price
discovery.
"Asia and emerging markets are seeing collateral damage to
interbank markets as dollar liquidity evaporates. While
equities are inexpensive against bonds, investors should
prepare for a hard landing for earnings," said Sean Darby,
chief Asia strategist with Nomura in Hong Kong in a note.
Darby believes Asian stocks are oversold but investors
should postpone buying until the credit situation clears up.
The euro rebounded after dropping to a 13-month low against
the dollar on Thursday on indications the European Central Bank
is leaning toward cutting interest rates after bank failures
threatened the euro zone economy.
The euro was up 0.3 percent to 145.95 yen <EURJPY=> after
earlier slipping below 144.88 yen to the lowest in two years.
This week investors have continued to find refuge in the
yen and the Swiss franc.
The dollar was steady at 105.30 yen <JPY=> and was down 0.3
percent to 1.1320 Swiss francs <CHF=>. The euro rose 0.3
percent to $1.3865 <EUR=> after dropping to around $1.3750 on
Thursday.
The main focus on Friday would likely be the vote in the
House of Representatives on a White House plan to buy up
illiquid securities from battered financial firms.
However, the September U.S. employment report will also be
released. Investors expect payrolls shrank by 50,000 jobs.
Government debt was still the favourite bet for investors
increasingly intolerant of having risk in their portfolios.
The 10-year Japanese government bond future <2JGBv1> was up
0.6 point at 137.89, rising for a second day.
The 10-year U.S. Treasury note slipped 7/32 in price, for a
yield of 3.65 percent <US10YT=RR>, up from 3.63 percent late on
Thursday in New York. The highly liquid bills market, which
investors have been using as an alternative source of
short-term investment, saw solid demand.
The 1-month bill yield <US1MT=RR>, which moves in the
opposite direction of the price, slipped 3 bps to 0.22 percent.
Spot gold <XAU=> climbed 0.8 percent to $842 an ounce
<XAU=> but is well off a 2-month high of $920 an ounce earlier
this week.
The November U.S. light crude contract <CLc1> fell 75 cents
to $93.22 a barrel, creeping toward a 7-month low of $90.51 hit
on Sept. 16.
