Asian stocks headed for their biggest fall in two weeks on Wednesday after much weaker than expected service sector data in the United states and Europe fueled fears of recession, sending investors fleeing to safer bonds.
Tokyo's benchmark Nikkei index and Singapore fell by around 4 percent by midday, while Hong Kong's blue-chip index tumbled more than 5 percent in a half-day session ahead of the Lunar New Year holidays, which begin on Thursday across parts of Asia.
The MSCI's measure of Asian stocks excluding Japan dropped 2.7 percent, on its way towards its biggest decline since losing 6.3 percent on Jan. 22, a day when investors had feared a protracted bear market was at hand.
Markets worldwide have buckled this year amid concerns that the sharply slowing U.S. economy will drag on global growth and on signs of more subprime-mortgage related problems in the financial sector. The MSCI ex-Japan index suffered its worst month in January since September 2001.
"It cannot be helped. The market is being hit by U.S. recession fears," said Yoshihiro Ito at Okasan Capital Management in Tokyo.
"The impact of subprime (mortgage) problems is spreading into the broader U.S. economy," Ito added
The vast U.S. services sector unexpectedly retrenched to recessionary levels in January, data on Tuesday showed, while euro zone services growth slowed to a near-halt, casting doubts about the outlook for Asian exports.
Worries about the fate of U.S. bond insurers also contributed to the sell-offs seen in the region, despite talk of various rescue plans, after Standard & Poor's on Tuesday warned the ratings of U.S. banks could be at risk.
Exporters such as Canon Inc slumped, as did regional financial firms such as Australia's Allco Finance and Japan's Mitsubishi UFJ Financial Group
Australian stocks also fell, hurt by a 7 percent decline in BHP Billiton after the world's biggest miner launched a hostile $147.4 billion bid for Rio Tinto
China's state-owned aluminium giant Chinalco and its partner Alcoa Inc, which last week surprised markets by taking a 9 percent stake in Rio, said they were analysing BHP's bid but that there would be no quick reaction.
Still, concerns about a pricey counterbid sent shares in Chinalco's listed subsidiary Aluminum Corp of China Ltd down 9.7 percent.
But trading in Asia was thinner than usual, with markets in South Korea, Taiwan, and China already closed for the rest of the week in what is turning out to be a less than festive start to the Lunar New Year.
FLEEING FOR SAFETY
Expectations that the European Central Bank will cut interest rates later this year kept the euro steady against the dollar, but the Japanese yen rose as the global stock slide sparked unwinding of risky carry trades.
Carry trades involve investors borrowing low-yielding currencies such as the yen to fund purchases of riskier assets which offer the potential of higher yields, such as stocks or commodities.
Bonds in the region were well bid as investors sought to avoid the slump in equity markets. Japanese government bond futures jumped by more than half a point in early trade, while Australian bonds extended a recent rally.
March 10-year Japanese government bond futures surged as much as 0.82 point and ended the morning session up 0.77 at 137.97.
But a further decline in the U.S. dollar could do more harm than good for the credit ratings of foreign governments, as it would hurt trade competitiveness and increase inflation among other factors, Moody's Investor Service said on Tuesday.
Oil prices extended their decline to just above $88 a barrel as the weak U.S. economic data reinforced fears that the world's largest economy is on the brink of a recession.
U.S. light crude fell 28 cents to $88.12 a barrel, adding to previous session's 1.8 percent drop.
Gold bounced back after falling a day earlier to its lowest level in almost two weeks, with spot prices last quoted at $889.75/890.75 an ounce. Platinum rose to $1,777/1,782 in Asian trade.