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Stocks plunge, yen surges as crisis worsens

HONG KONG – Asian stocks plunged on Friday, led by a 11 percent drop in South Korean shares, as the global economic slowdown and emerging market instability hurt an array of corporate outlooks, pushing up government bonds and the yen.

European stock futures were down 5.5 percent, with sentiment on global equities worsening despite signs this week of stabilization in short-term money markets.

The financial crisis has spread far beyond the banking sector, with electronics maker Sony Corp and U.S. online retailercutting their forecasts in the face of weakening consumer demand.

The stronger yen, which this week rose the most against the U.S. dollar in a decade, has been particularly damaging to the competitiveness of Japanese exporters because it curbs their overseas profits when they are brought home and erodes the competitiveness of their products.

Fears about potential sovereign debt default in some developing economies, especially in Europe where many of the countries run current account deficits, has accelerated a move out of emerging market assets and increased an unwillingness among investors to take risks.

'Players are now focused on emerging markets as the credit crisis takes its toll on them,' said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ in Tokyo. 'Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate,' he said.

The MSCI index of Asia-Pacific equities traded outside of Japan fell 5.6 percent to a fresh 4-year low and was on track for its eighth weekly loss.

South Korean stocks have been hit especially hard this year, with the benchmark KOSPI index finishing down by a record of more than 20 percent in the week. The index ended the day 10.6 percent lower, falling below the psychologically key level of 1,000 points for the first time since June 2005.

'The 1,000-point level has a lot of meaning for the Korean stock market. It took 16 years to get there and the level collapsed just in a year, with investors completely losing confidence about economy and government bailouts,' said Kim Seong-ju, a market analyst at Daewoo Securities in Seoul.

Japan's Nikkei share averageplummeted 9.6 percent to the lowest in 5- years. Sonyslumped 14.1 percent and was one of the biggest decliners in the index.

DOLLAR AND YEN RULE

The U.S. dollar and the yen have strengthened significantly since the financial crisis broke in August 2007, particularly in the last month, as investors in Japan and the United States cut overseas investments and brought money back home.

A lot of this investment had gone into government bonds, with money managers figuring the backing of the world's two largest economies was the closest thing to safety. State Street Global Markets, which tracks 15 percent of the world's tradeable assets, said capital flows from institutional investors into sovereign bonds were the highest in the 7-year history of its data.

Many of these investors have been keeping their capital in dollars. 'In a market where discretionary traders are on the sidelines, scared by volatility and the expense of trading, these institutional flows are likely to have an even greater relative price impact,' State Street analysts said in a note.

The yen has also been a beneficiary of investor repatriation and the unwinding of investment in higher-yielding currencies, which have accelerated as economic conditions deteriorate in some emerging markets dependent on portfolio investment and trade from developed markets.

'While there has been a marked improvement in interbank money market interest rates, the velocity of money in the global economy continues to decelerate,' said Sean Darby, chief Asia strategist with Nomura in Hong Kong.

'The recent EU and U.S. measures to restore confidence in domestic banking systems may have come too late to reverse capital outflows from emerging markets,' he said in a note.

The euro dropped 2.6 percent to 122.20 after earlier hitting a six-year low of 121.70 yen on trading platform EBS. The dollar fell 1.6 percent to 95.69 yen after sliding as low as 95.35 yen.

However, the dollar was at a 5-year high against the British pound, while the euro was down 1.6 percent to $1.2767, near a 2-year low of $1.2726 hit on Thursday.

Government bonds in the euro zone, Japan and the United States have been a haven for investors hoping to wait out the market turmoil and steep global economic slowdown.

Many economists are expecting rising unemployment in major economies to curb consumer spending further, especially after continued U.S. claims for unemployment insurance remained above the 3 million high watermark for a 26th week and reports that Goldman Sachswas cutting 10 percent of its staff.

The benchmark 10-year note rose 22/32 in price, pushing the yield down to 3.605 percent from 3.69 percent late on Thursday in New York. The 2-year note yield slipped to 1.525 percent from 1.60 percent.

The 10-year Japanese government bond future rose 0.59 to 137.70.

Oil prices turned lower on the day on expectations recessions in major economies would hurt energy demand. U.S. light crude for December delivery fell 87 cents to $66.97 per barrel.

OPEC is widely seen cutting output at an emergency meeting later on Friday after slowing demand and the growing financial crisis sent prices crashing from record highs set this summer.