Financial News

Friday October 10, 05:01 AM
TOPWRAP 1-Stocks plunge, pressure on G7 to act on crisis

HONG KONG, Oct 10 (Reuters) - Fearful selling clenched Asian markets on Friday after U.S. stocks plunged, heaping pressure on economic powers to halt a global spiral of financial distress and slowing growth.

With financial policy makers from the Group of Seven major industrial nations due to meet in Washington later on Friday, bank bailouts, liquidity injections and interest rate cuts across the world have failed to quell investor anxiety.

Japan's Nikkei (news) average tumbled more than 11 percent, leaving it facing the biggest one-day drop since a 1987 crash. The Kyodo news agency reported that the Tokyo Stock Exchange suspended some trading in futures and options for around 15 minutes.

Hong Kong's Hang Seng (news) index opened down 7.7 percent.

'No one is buying. Fundamentals don't matter any more and there's no explanation for such a plunge,' said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

Overnight, U.S. stocks slumped more than 7 percent on fears that credit markets would stay frozen, paralysing the world's financial system and slowing economies to a standstill.

At the centre of a financial crisis now almost a month old, credit markets remained in deep distress. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans hit their highest level of the year.

The cost of protection against defaults in Asia's sovereign and corporate debt also soared to record highs on Friday on fears financial crisis would spread to the region.

'Equity and fixed income markets seem to be stuck in a negative feedback loop as the lack of interbank lending and funding and waning investor confidence keep pushing one another,' UBS (Virt-X: UBSN.VX - news) currency strategists said in a note to clients.

DEEP DISTRESS

Indonesia dropped plans to reopen its stock market after a two-day suspension and despite policy makers unveiling new measures aimed at calming fears that Southeast Asia's top economy faces a new crisis.

In South Korea, where there is also growing panic, the finance minister will fly to New York where, on the sidelines of the annual IMF/World Bank meetings, he will meet leading U.S. bank executives to seek expanded credit lines for his country's banks.

Singapore said its export-dependent economy had sunk into its first recession in six years, and eased monetary policy. [ID:nSIN389047]

In the latest attempt to instil confidence in the financial system, the U.S. and Dutch governments readied on Thursday public funds to shore up the capital of banks, matching a similar move this week by Britain.

The U.S. Treasury plans to start injecting capital in U.S. banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking. [ID:nN09535775]

That partial nationalization of American banks would represent an enlarged role for the U.S. government as the lender and investor of last resort.

Until now, U.S. policy has focused on a plan to buy banks' distressed assets, but many analysts say a move to shore up banks' capital would be a more direct way to break a logjam in credit markets that has shut down new borrowing for consumers and businesses.

In a sign of the escalating pressure on banks, direct borrowing from the Federal Reserve climbed to a record for a second straight week and has averaged $420 billion per day. [ID:nNO9677770]

The Dutch government also announced it was setting aside 20 billion euros ($27.5 billion) of capital to protect banks and said other European governments were planning similar measures.

But the Dow Jones industrial average dived over 7 percent to below 8,600 points for the first time since May 2003.

HOPES ON G7 meeting

U.S. stocks have now lost $2.3 trillion this week and $8.3 trillion over the past year, according to the Dow Jones Wilshire 500, the broadest measure of U.S. equities available.

'The market is in a phase now that it doesn't believe in anything,' said Sasha Kostadinov, a fund manager and analyst for Shaker Investments in Cleveland, Ohio. 'I don't know what will turn the sentiment.'

The punishing decline in U.S. stocks added to pressure on policy makers to do more to stem the crisis -- even after approval of a $700 billion U.S. bailout fund and an emergency rate cut by central banks over the past week.

This week, central banks from Europe and the United States to China, South Korea and Taiwan have slashed interest rates, as fears of inflation recede into worries about economic growth.

Japan is considering other measures in the face of new recessionary signals.

G7 finance ministers and central bankers meet in Washington on Friday amid expectations that the group will present a united front on policy to contain the crisis.

'Various countries have done bits and pieces. Nobody has done all of them,' said David Mackie, head of Western European economic research at JPMorgan. 'It's not entirely obvious that these measures are turning the tide.'

'At the end of the day, if you socialize enough of the financial system, it has to work,' said Mackie.

(Additional reporting by Reuters bureaus around the world)

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