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2nd UPDATE: AIG Rescue Fails To Revive Asian Markets

SINGAPORE (Dow Jones)--Asian stock markets failed to gain much traction Wednesday from a U.S. government rescue of insurer American International Group Inc., with many expecting more bad news from the beleaguered U.S. financial sector.

A number of markets erased gains to turn lower while others came off their highs, leaving intact the hefty declines they have posted for the week so far.

Japan's Nikkei 225 ended only 1.2% higher while Hong Kong's Hang Seng Index was 3.1% lower by the early afternoon.

While AIG rescue eased concerns about the systemic risk created by the insurer's failure given its global reach, worries remained about the health of the U.S. financial sector as a whole as well as the broader economy, said analysts.

Many were casting around for the next potential trouble spot, with CNBC reporting on its Web site that Morgan Stanley officials were considering whether the firm should stay independent or merge with a bank amid turbulence in its stock. CNBC added Morgan officials weren't in merger talks as of late Tuesday.

"It's not like a game of soccer and when the final whistle goes, it's all over," said Forsyth Barr institutional broker David Price, describing the downbeat view in markets despite the AIG rescue.

"There is still lots of overtime left in this game," he added.

European spreadbetters were still calling stocks there higher, but U.S. stock futures were now only up a little in screen trade. CMC Markets dealer Matt Buckland was forecasting London's FTSE 100 to open up a somewhat cautious 65 points, the French CAC-40 up 83 points and the German DAX up 77 points.

"Once again we seem to be left lauding a temporary measure that staves off some kind of meltdown, rather than looking at an actual solution to the bigger problem," he said.

Standard Chartered analysts drew parallels with the market response to the recent bailout of U.S. mortgage giants Freddie Mac and Fannie Mae: "The relief rally following the Fannie/Freddie conservatorship evaporated within a day and leaves us wary this will mark the turn from the wholesale reduction in risk allocations."

After resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy, the Federal Reserve earlier Wednesday agreed to provide AIG with a short-term "bridge" loan of $85 billion.

Some said the Fed had gone too far: "The Fed has broken all the rules of bailout and moral hazard. Will it now take over Ford or GM?" asked CMC Markets chief FX strategist Ashraf Laidi.

The Nikkei 225, which fell 5% Tuesday, failed to see much of a recovery in financial stocks; the index ended at 11,749.79. Mitsubishi UFJ Financial Group added just 1% while Mizuho Financial Group fell 0.7%.

Australia's S&P/ASX 200 erased early gains to end down 0.6% at its lowest closing level since December 2005; financials were sharply negative with Macquarie down 7.8%, National Australia Bank falling 5.5% and ANZ 2.2%.

Resource stocks also fell amid an ongoing slide in commodity prices, with BHP Billiton down 2.1%, Rio Tinto down 4.5% and Fortescue falling 6.6%.

Korea's Kospi Composite, which dropped 6.1% Tuesday, was the best performer, finishing 2.7% higher. Brokerage stocks gained there with Mirae Asset Securities rising 8.1% and Samsung Securities gaining 6.5%. Taiwan shares ended 0.8% higher after a brief foray into negative territory, but it was a fairly tepid recovery from a 4.9% decline Tuesday. Cathay Financial Holding fell 4.5%.

The HSI, which initially eked out a 2% gain, retreated to the 17,736.94 level; China-related bank stocks were weak again, in part on margin concerns, with China Construction Bank falling 5.6%, ICBC down 4.7%, and Bank of Communications lower by 5.3%.

The Shanghai Composite Index fell 3% as financial stocks declined on the mainland.

Malaysia shares were down 0.5% while Singapore's Straits Times Index had fallen 1.6%.

In India, the Sensex was down 1% after an initial 0.8% gain; bank stocks were lower with State Bank of India down 1.7%, Canara Bank off 1.2%, and ICICI down 3.9%.

Large-cap Ranbaxy dropped 8% after the U.S. FDA banned the company from importing more than 30 generic drugs into U.S., citing concerns about the company's production practices at two India plants.

In currency markets, the U.S. dollar rose over Y106 after an early fall to Y105.21; it was recently around Y106.09. The yen was on the backfoot against other crosses, in a mild return of risk appetite, with the euro back at Y150.61 after touching Y148.45.

But the euro was higher against the dollar, at $1.4196.

"The lack of a more positive dollar response may reflect concern that this also may not be the cathartic event that excites the animal spirits and revives a healthier appetite for risk," said analysts at Brown Brothers Harriman.

U.S. Treasury yields rose with the 10-year note down 14/32 at 103 18/32, yielding 3.568%. But Japanese government bonds only gave back some of Tuesday's large rise with lead futures down 0.83 at 138.62 and the 10-year yield up 2.5 basis points at 1.49%.

Asian credit default swaps spreads tightened with the Markit iTraxx Asia ex-Japan investment-grade CDS index at 185 basis points as against 221.50 basis points Tuesday.

Nymex crude futures were recovering from a large fall in New York with October crude $2.77 higher at $93.92 a barrel on Globex. Spot gold was higher by $3.10 at $780.80 per troy ounce.

-By Rosalind Mathieson, Dow Jones Newswires; +65-6415-4140; Rosalind.Mathieson@dowjones.com

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(END) Dow Jones Newswires

September 17, 2008 02:45 ET (06:45 GMT)


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