Asia stocks tumble on inflation fears


Posted at Jun 12 2008 03:17 PM | Updated as of Jun 12 2008 11:17 PM


- Asia stocks fall after oil spikes $5 overnight
- Financial sector hurt by report Lehman needs more capital
- U.S. dollar rises on confidence in the Federal Reserve

HONG KONG - Asian stocks fell to two-month lows on Thursday after oil prices jumped on a report showing tightening supply, adding to fears about rising inflation and higher interest rates around the world.

Financial companies, such as Sumitomo Mitsui Financial Group and National Australia Bank, were under fire after a report that U.S. investment bank Lehman Brothers may hunt for more capital after already raising $6 billion, raising questions about the company's management.

Meanwhile, oil's unrelenting climb has made investors nervous about higher borrowing costs, especially after Federal Reserve Chairman Ben Bernanke earlier this week said the recent rise in oil has increased the chances that inflation pressures will grow.

"Inflation worries are heightening the possibility that central banks, including those of South Korea and the United States, will raise key interest rates in the near future," said Y.S. Rhoo, a market analyst at Hyundai Securities.

Japan's Nikkei share average fell 2 percent to the lowest level in two weeks. Exporters with high-profile brands overseas were some of the heaviest hit, such as Canon Inc and Sony Corp.

The MSCI index of pan-Asian stocks dropped 2.3 percent to the lowest since April 2, while a separate index of Asia-Pacific equities excluding Japan was off 2.4 percent to the lowest since March 25.

Korea's KOSPI declined 1.3 percent , led by POSCO Co Ltd, the world's fourth largest steelmaker.

The Bank of Korea was the latest central bank to warn about widening inflation pressures, though it kept its benchmark interest rate unchanged after a meeting.

Several central banks in the region, including those in China, India, Indonesia and the Philippines, have already begun to tighten monetary policy to fight upward pressure on prices.

And companies and governments in Asia continue to cautiously pass on higher costs to consumers.

China's Shandong province, a major steel-making area, has raised power tariffs for industrial users during peak hours as it faces a possible power shortage, offering a boost to utilities squeezed by surging coal prices.

Higher energy and food prices have sparked double-digit inflation rates in some Asian countries and increasingly have pointed to a bear market for equity markets in the region.

Asian bears

From a record high on Nov. 1, the MSCI Asia ex-Japan index is now down around 24 percent. The popular definition of a bear market is one characterized by a prolonged period of falling prices, usually by 20 percent or more.

In the last six months, global investors have reduced their exposure to the region, which was only a year ago hailed for its high returns and low inflation.

Data from The Bank of New York Mellon, one of the biggest custodians of foreign assets in the world, showed that since January, flows of capital out of the Philippines and Hong Kong were among the largest in the world.

U.S. light crude prices fell 95 cents to $135.43 after rising around $5 overnight on a report showing U.S. stockpiles fell for the fourth straight week. Crude hit an all-time high above $139 hit last week.

Oil prices have risen nearly seven-fold since 2002, partly because of rising demand from China and other rapidly developing countries, pressuring major consumer the United States, which is already hobbled by a housing slowdown and credit crunch.

Representatives of the world's biggest oil consumer and producer nations will meet in Saudi Arabia on June 22 to discuss the oil spike, which producer group OPEC says is due to speculation, not a lack of supply.

The U.S. dollar rose against the euro and yen, continuing to rally on investor confidence the Fed will be able to balance growth with mounting inflation pressures.

The dollar has been strengthening the most against Asian currencies as the view takes hold that central bankers in the region are behind the curve in battling inflation, spurring expectations for higher interest rates.

"Pledges to tackle actual or threatened inflation with tighter monetary policy can be a moderate currency support, but only in so far as investors have confidence in the message from policymakers and inflation is not undermining asset prices," said Patrick Bennett, Asia foreign exchange and interest rates strategist with Societe Generale in Hong Kong.

"For the global economy right now there is greater fear of the latter," he said in a note.

The euro tumbled 0.5 percent to $1.5477 and has remained in a range of $1.60 to $1.53 ever since mid March. Against the yen, the dollar rose 0.4 percent to 107.27 yen and is up 12 percent in the last three months.

The dollar climbed to the highest since late February against the yen on Wednesday, bolstered Bernanke's stronger comments about containing inflation.

Bernanke warned markets the Fed will not be complacent as declines in the dollar helped to spur crude's 40 percent climb so far this year.