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HONG KONG - Asian stocks dropped sharply and the yen hit a 4-month high on Tuesday, after U.S. lawmakers' shock rejection of a $700 billion effort to end financial panic triggered the biggest fall in the U.S. S&P 500 since the 1987 stock market crash.
Raw fear gripped markets, with oil prices diving by a tenth and gold prices rising for a third day, as investors faced hard realities that big economies could all be headed for a recession and the crisis of confidence in the bank industry could persist.
The failure of Washington's biggest and most comprehensive bid to keep the financial sector shockwaves from tearing up the real economy accelerated a move by investors from perceived risky assets to more stable holdings and even plain cash.
"Those voting against it saw, like me, that there's no kind cure for excessive leverage," said Brett Williams, credit analyst with BNP Paribas in Hong Kong. "A modified bill may likely be represented for another vote, in an effort to save some face, but better to brace for violent price swings in all asset classes," he said in a note.
Japan's Nikkei share average tumbled 4.5 percent to a 2008 low, and the MSCI index of Asia-Pacific stocks outside Japan fell more than 3 percent, not far off a 26-month low.
Global equities have had a high inverse correlation with the Chicago Board Options Exchange Volatility index, also known as the VIX The last 24 hours have been no exception.
The VIX - Wall Street's fear gauge - closed at a record high overnight, reflecting immense needs to hedge positions in U.S. equities.
Investors around the world have been scrambling to eliminate any risk in their portfolios, loading up on traditional safe harbours in times of extreme volatility like short-term U.S. government debt and gold.
Gold prices in the spot market edged up 0.25 percent to $905.50 an ounce after touching a 2-month high overnight of $920 an ounce.
Yields on Treasury debt with maturities below 1-year climbed, with the 1-month bill yield sinking to 0.035 percent.
The 3-month bill yield was at 0.7 percent Another asset that has gained favour during times of widespread uncertainty is the yen.
Though central banks outside the United States have had to set up special currency swap programs to meet high demand for U.S. dollar funding, investors have been turning to the yen as a haven.
"For currencies, the only trade in town with any staying power is risk aversion and the yen remains the favored pick," said Alan Ruskin, chief international strategist with RBS Greenwich Capital, in a note.
"I think the yen positive story remains clear-cut against all the major Europeans, and particularly the emerging world."
The dollar dropped to a 4-month low near 103.50 yen before edging back up to 104.24 yen The euro was down a modest 0.1 percent at 149.80 yen and off 0.35 percent at $1.4368 The U.S. House of Representatives voted 228-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up illiquid assets from struggling banks.
House Republicans, in particular, balked at spending so much taxpayer money just before the Nov. 4 presidential election. Australian Prime Minister Kevin Rudd called for global pressure to convince U.S. lawmakers to put the world's economy ahead of the U.S. presidential race and pass the bailout package.
"These are turbulent times, these are worrying times," Rudd told a news conference in Canberra. "The call we need to make is for them to put aside party politics and pass this package because it is necessary for the stabilisation of U.S. financial markets and global financial markets," he said.
"All of our interests are at stake here." Banks continued to be toppled or swallowed up by other firms, both in the United States and in Europe, as the financial crisis spread. In the latest big deal, Citigroup agreed to buy Wachovia Corp's US banking operations for $2.2 billion. --REUTERS
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