Hong Kong: Asian stocks fell and government bonds rose on Tuesday, after a 41% quarterly increase in bad loans at Bank of America renewed fears of deteriorating credit, halting a rebound in risk taking.
The financial sector was under fire after the largest US bank greatly increased its reserves for non-performing assets, raising uncertainties about future writedowns at a time when investors are already worried about the results of stress tests on the banking industry.
“One day of a major correction does not break a trend, especially the ferocious rally of the past six weeks,” said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong, in a note.
“But we do expect a more substantial return to the risk aversion trade some time in the near term, most likely in relation to the U.S. bank stress test results expected on 4 May.”
Japan’s Nikkei share average tumbled 3.1%, weighed down the most by a mix of exporters and industrials.
Shares of Toyota Motor Co dropped 4.4% on a report the automaker will likely produce 12% fewer vehicles this financial year because of a sales slump.
The MSCI index of Asia Pacific stocks outside Japan fell 2.8%, after hitting a six-month high last Thursday. The index is still up some 25% in the last month, in what many strategists regard as a bear market rally.
Government bonds, which have been weighed by fears about large upcoming supply to finance government stimulus spending, actually got a lift as investors bailed from equities.
The yield on the benchmark 10-year US Treasury note slid to 2.83% from 2.85% late in New York, with new supply light this week.
The June 10-year Japanese government bond future rose 0.3 point, still working its way back after hitting a 5-1/2-month low on 9 April.
Firm demand was expected for a ¥900 billion auction of 20-year bonds later in the day, which is expected to have a 2.1% coupon, higher than the last 20-year auction.
The euro was near a one-month low against the yen and US dollar, with support for the single currency limited ahead of the next European Central Bank meeting on 7 May.
Currency investors were focussed on what kind of unconventional policy actions the central bank could take to ease credit conditions and whether internal politics will prevent an aggressive stance.
The euro was nearly unchanged at $1.2919, not far from Monday’s low of $1.2883. Against the yen, the euro was at ¥126.68 after earlier touching a one-month low near ¥126.
The retreat from global equities kept pressure on US crude oil prices, with the front month edging down 0.5% to $45.65 a barrel after a near 9% drop on Monday.