Hong Kong - Asian stocks slumped to their lowest since December 2004 on Wednesday as poor US corporate results and falling commodity prices fanned worries of a protracted global economic slowdown.
The US dollar surged to a two-year high against a basket of currencies on expectations that central banks around the world will react to slowing growth in their economies by catching up to this year's deep interest rate cuts by the Federal Reserve.
European stock index futures pointed to drops of up to 2.6% in early trade, darkening the outlook for global equity markets.
The cost of protection against defaults in Asian debt spiked to records after Argentina moved to take over its private pension system, and as fears over debt defaults rocked confidence in emerging markets.
Some Asian companies have been caught off guard by how much credit markets have tightened, which constrains their access to capital, as well as the pace at which global demand has dropped.
"As the credit crunch has worsened, wholesale business inventories have risen, causing an alarming rise in inventories in Asia and emerging markets at a time when seasonally these are usually being drawn down," said Sean Darby, chief Asia strategist with Nomura in Hong Kong.
"We would expect earnings to be further revised down within Asia and global emerging markets," he said in a note.
Losses in Asian shares accelerated in the afternoon, with Japan ending down 6.8%, and South Korea slumping 5.1%.
Mitsubishi UFJ Financial Group's shares, which recently invested in Morgan Stanley dropped 8.8% after the Nikkei business daily said Japan's top lender will sharply cut its half-year net profit estimate.
The MSCI index of Asia-Pacific stocks outside Japan declined 5.1%, at one point touching its lowest since December 2004.
Hong Kong's Hang Seng index dropped 2.9%, with CITIC Pacific hit for a second day after warning of nearly $2bn in potential losses from unauthorised currency trading. CITIC Pacific shares fell a further 6% after losing half of their market value on Tuesday.
Earnings estimates for Asia-Pacific companies excluding Japan in 2009 have already fallen for four consecutive months, according to Thomson Reuters data. In the last month to October 16, forecasts fell 3.44%, the biggest monthly decline since November 2001.
Companies in Hong Kong, Singapore and Taiwan were all expected to post falling earnings this year, but were still seen having double-digit growth in 2009, according to global estimates tracker IBES.
Emerging market selloff
The cost of protection against a default in Asin debt surged amid concerns about the deteriorating health of emerging markets. Pakistan, for example, is feared to be in critical condition due to dwindling foreign exchange reserves.
That has raised fears about policy responses in emerging markets, especially following news on Tuesday that Argentina will take over its $30bn private pension system in order to guarantee payments to retirees.
A key measure of risk aversion, the iTRAXX investment-grade index widened by about 40 basis points (bps) to 380. The equivalent high yield index jumped some 100 bps to as high as 1 200, both marking new records, according to a Hong Kong-based trader.
The worsening mood comes despite massive cash injections, bank bailouts and interest rate cuts by central banks and governments.
On Tuesday, the Federal Reserve unveiled Washington's latest step to end the crisis, saying it could lend up to $600bn to buy certificates of deposit and commercial paper from money market funds.
The weaker outlook for the global economy is hitting commodities as well. US crude oil futures slid $3 to $69.17 a barrel, on mounting worries that expected output cuts by producer group Opec will not be enough to offset weakening global demand.
Frantic forex trade
The euro fell 1.7% to $1.2831 after dropping as low as $1.2740 on trading platform EBS, a fresh 20-month low. Sterling was down 2.5% at $1.6255 after sliding as low as $1.6201, its lowest since September 2003.
The dollar index, which measures the greenback's value against a basket of six currencies, was up 1.5% to 85.658, after rising to 85.921, the highest since November 2006.
Trade was frantic, with bid/ask trading spreads much farther apart than usual, indicating very illiquid trade.
Investors reacted to the sliding equity prices by moving into the safety of government debt, with Japanese government bond futures up a full point.
December 10-year JGB futures rose by a full point to 136.65 and the 10-year JGB yield fell 4.5 basis points to 1.540%.
- Reuters