Asian stocks fall on Italy rating downgrade

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A man walks in front of the electronic stock board of a securities firm in Tokyo, Japan, Tuesday, Sept. 20, 2011. Asian stocks headed lower in early trading Tuesday, held back by intensifying worries over Greece's ability to fend off a massive debt default and a credit downgrade slapped on Italy. The benchmark Nikkei 225 stock average lost 124.42 points, to end morning session at 8739.74. Photo - Itsuo Inouye/AP

Asian stocks and US equity-index futures dropped and the euro slid for a third day after Italys credit rating was lowered by Standard & Poors. South Koreas won slumped to its weakest level this year, while Treasury two- year yields declined to a record low.

The MSCI Asia Pacific Index lost 1.1 percent at 3:05 p.m. inTokyo. S&P 500 Index (SPX)futures retreated 0.7 percent and Euro Stoxx 50 Index decreased 0.8 percent. Two-yeartreasury yields dropped as much as one basis point to a new low of 0.1431 percent. Europes single currency fell 0.5 percent versus the dollar and declined 0.6 percent against the yen. The won sank as much as 1.7 percent.

Standard and Poor’s cut its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a move that took markets by surprise, warning a deteriorating growth and deepening political uncertainty.

“It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here,” said Stephen Roberts, a senior economist at Nomura in Sydney, pointing to a sharp fall in the Australian dollar on the news.

Analysts said the downgrade was ominous for the global economy and needed an urgent response. It overshadowed reports thatGreece, scrambling to avoid running out of money within weeks, was near a deal to continue receiving bailout funds and that Brazil was willing to pump in $10 billion through the IMF to aid Europe.

“Italy is a much bigger deal than Greece,” said Kathy Lien, director of currencyresearch at GFT in New York.

Greecewill hold another call tonight with its main creditors after a productive round of talks aimed at staving off default. The US Federal Reserve will start a two-day meeting today amid data forecast showing that housing and building permits are still on a decline.

JAPAN STOCKS SLIDE

About seven shares fell for every four that gained on MSCIs Asia Pacific Index. The gauge slumped 1.5 percent yesterday, when Japanese markets were closed for a national holiday. Honda Motor Co. and Sony Corp. fell more than 3 percent each, pacing a slump among exporters in Tokyo. The Nikkei 225 Stock Average sank 1.6 percent,Australias S&P/ASX 200 Index slid 1 percent, while South Koreas Kospi Index climbed 0.9 percent.

Futures expiring in December indicate theS&P 500may extend yesterdays 1 percent drop. Equities had trimmed losses yesterday as Greeces Finance Ministry said it had a productive and substantive discussion with international officials who will determine if the country gets more funds.

The euro traded at $1.3612 from $1.3686 inNew Yorkyesterday. The shared currency declined to 104.15 yen from 104.82. Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. S&P said Italys net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

UNDER PRESSURE

Were going to see the euro continue to come under pressure, said Chris Weston, an institutional trader at IG Markets inMelbourne. One of the big things were very concerned with is whats going to happen with Italian borrowing costs and this could see some further selling of bonds.

South Koreas won dropped 1 percent to 1,148.90 against the US currency and earlier reached 1,156.50, the weakest level since Dec. 22. Malaysias ringgit declined for an 11th day and touched 3.1425 per dollar, also the lowest level this year.

The so-called Aussie fell 0.3 percent to $1.0195, paring losses of as much as 0.7 percent, TheReserve Bankof Australia said it is well placed to respond to global and domestic economic risks or the threat of an acceleration of inflation, according to minutes of a Sept. 6 meeting when it keptinterest ratesunchanged.

Treasury 10-year yields slipped one basis point to 1.94 percent, extending a 10-basis-point drop yesterday. Two-year yields were little changed after an earlier slide. PresidentBarack Obamacalled for $1.5 trillion in tax increases over the next decade to help trim the deficit.

FED MEETING

Fed officials may propose new measures to galvanise the economy when theFederal Open Market Committeecompletes a two-day meeting Wednesday.Ben S. Bernanke, the central banks chairman, told economists in Minneapolis that policy makers have measures at hand and are prepared to employ these tools as appropriate.

Housing starts probably fell 2.3 percent to 590,000 in August from the previous month, when they declined 1.5 percent, according to the median economist forecast in a Bloomberg News survey. Building permits, an indicator of future construction, may have slipped 1.8 percent, another survey showed.

The latest series of Markit Group Ltd.s indexes measuring the cost of insuring Asia-Pacific debt with credit-default swaps started trading today. The Series 16 Markit iTraxx Asia index of swaps linked to 40 investment-grade borrowers outsideJapanwas at 205 basis points, according to Credit Agricole SA. That compares with a closing price of 172.8 basis points for the previous series yesterday, according to data provider CMA.

New series of the benchmarks are created every six months when companies are added or dropped depending on their ratings, cost of protection and ease of trading.

Oil for October delivery declined 0.1 percent to $85.60 a barrel. Futures are trading near a three-week low after losing 4.1 percent over the previous two days. December-delivery wheat gained 1 percent to $6.795 a bushel, rebounding from a three-day drop, while corn gained 0.7 percent to $6.9675 a bushel.

Sources: Bloomberg, Economist, Reuters

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