Hong Kong: Asian stocks slumped on Friday, led by a 7% drop in South Korean shares, as the global economic slowdown and emerging market instability hurt an array of corporate outlooks, pushing up government bonds and the yen.
The financial crisis has spread far beyond the banking sector, with electronics maker Sony Corp and US online retailer Amazon.com Inc cutting their forecasts in the face of weakening consumer demand.
The stronger yen, which this week rose the most against the US dollar in a decade, has been particularly damaging to the competitiveness of Japanese exporters as it curbs their overseas profits when they are brought home and erodes the competitiveness of their products.
Fears about potential sovereign debt default in some developing economies has accelerated a move out of emerging market assets and increased an unwillingness among investors to take risks.
“Players are now focused on emerging markets as the credit crisis takes its toll on them,” said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ in Tokyo. “Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate,” he said.
The MSCI index of Asia-Pacific equities traded outside of Japan fell 4.1% to a fresh 4-year low and was on track for its eighth weekly loss.
South Korean stocks have been especially hit hard this year with the benchmark KOSPI index poised for the biggest weekly decline since the 1997 Asian financial crisis. The index was down 7% on the day, falling below the psychologically key level of 1,000 points for the first time since June 2005.
“The 1,000-point level has a lot of meaning for the Korean stock market. It took 16 years to get there and the level collapsed just in a year, with investors completely losing confidence about economy and government bailouts,” said Kim Seong-ju, a market analyst at Daewoo Securities in Seoul.
Japan’s Nikkei share average fell 7%, down for a third day after earlier touching a 5-year low, and shrugging off late gains on Wall Street Sony slumped 12% and was one of the biggest decliners in the index.
Dollar and Yen rule
The US and the yen have strengthened significantly since the financial crisis broke in August 2007, particularly in the last month, as investors in Japan and the United States cut overseas investments and brought money back home.
A lot of this investment had gone into government bonds, with money managers figuring the backing of the world’s two largest economies was the closest thing to safety. State Street Global Markets, which tracks 15% of the world’s tradeable assets, said capital flows from institutional investors into sovereign bonds were the highest in the 7-year history of its data.
Many of these investors have been keeping their capital in dollars. “In a market where discretionary traders are on the sidelines, scared by volatility and the expense of trading, these institutional flows are likely to have an even greater relative price impact,” State Street analysts said in a note.
The yen has also been a beneficiary of investor repatriation and the unwinding of investment in higher-yielding currencies.
The euro fell more than 2% to a six-year low of 122.75 yen on trading platform EBS. The dollar fell 1.5% to a 13-year low below 95.50 yen
However, the dollar was at a 5-year high against the British pound while the euro was down 1.1% to $1.2790 near a 2-year low of $1.2726 hit on Thursday.
Government bonds in the euro zone, Japan and the United States have been a haven for investors hoping to wait out the market turmoil and steep global economic slowdown.
Many economists are expecting rising unemployment in major economies to curb consumer spending further, especially after continued US claims for unemployment insurance remained above the 3 million high watermark for a 26th week and reports that Goldman Sachs was cutting 10% of its staff.