Asian stocks and the U.S. dollar fell while Treasuries rose on Friday after talks over a $700 billion plan to save the financial system hit problems and the biggest ever U.S. bank failure dashed hopes for a quick recovery.
JPMorgan Chase & Co bought certain Washington Mutual Inc assets for $1.9 billion after the largest U.S. savings and loan was closed overnight by a U.S. regulator.
The deal, the latest in the last few weeks that have shaken up the financial sector, showed how unstable the bank industry is and why stakes in agreement on the bailout plan are so high.
The U.S. dollar weakened against the yen and Swiss franc, two currencies associated with stability, as a bipartisan deal to get what is called the Troubled Assets Relief Program turned into a law may have to wait until at least the weekend.
"We'd have to pinpoint dollar weakness on the TARP plan and overnight there has been no progress on that. In fact it seems to be getting bogged down," said Jan Lambregts, head of Asia research with Rabobank Global Financial Markets in Hong Kong.
"The Congress doesn't really want the plan — no one really wants the plan — but the alternative is too bad to contemplate."
The dollar was down 0.7 percent against the yen at 105.70 yen and off 0.5 percent against the Swiss franc at 1.0834 francs.
The euro was up 0.3 percent to $1.4660 about two cents away from a one-month high hit on Monday.
U.S. Treasury debt prices rose, with the most prominent gains in long-maturity bonds. The 10-year note rose 16/32 in prices, pushing down the yield to 3.805 percent from 3.84 percent late in New York.
The yield on the 3-month bill slipped two basis points to 0.75 percent as investors continued to pile into the very short-end of the market in search of liquidity and safety.
STRESS IN ASIA MARKETS
Money markets have stabilised somewhat but lending between banks remained sluggish and confidence low. The spread of 3-month eurodollar rates over 3-month U.S. Treasury bill yields, also known as the TED spread widened a bit from late Thursday to 275 basis points, but is lower on the week.
The spread is used as a gauge of risk aversion and tightness in short-term lending.
Short-term U.S. dollar borrowing rates among banks have been relatively stable this week after a series of currency swaps were set up with the Federal Reserve and persistent liquidity injections.
However, money markets across Asia showed evidence of increasing stress. In Singapore, 3-month interbank rates jumped to 3.77 percent the highest since January 2008. Hong Kong's 3-month interbank rates eased slightly to 3.39 percent after hitting a 2008 high on Thursday of 3.80 percent
Equity markets reflected little conviction ahead of further developments in Washington.
Japan's Nikkei share average was down 1.3 percent and has traded in a very narrow range this week.
The MSCI index of Asia-Pacific stocks outside of Japan was down 1.8 percent and on track for a fourth consecutive week of declines.
Hong Kong's Hang Seng index fell 1.5 percent, with shares of Ping An Insurance, China's second-largest insurer, falling 10 percent. Ping An owns a 5 percent stake in European financial firm Fortis, whose shares tumbled on Thursday on market talk the Dutch Central Bank had asked another bank to supply Fortis with capital.
U.S. stock market futures extended a decline after a late-night White House session between Treasury Secretary Hank Paulson and congressional leaders ended in partisan gridlock. The S&P 500 future was down 1.5 percent.
Gold climbed 0.7 percent to $881.65 an ounce, but it remained around $28 below a seven-week high hit on Tuesday.
The JPMorgan purchase of WaMu assets cleared away some of the risk that a failing bank could drag others down with it but bickering over the financial bailout in Washington only worsened a sense of dread about the economic outlook.
"What's really required at the moment is U.S. Congress to step forward and show united front on the bailout plan. That's really where the uncertainty is at the moment, that's really what will give markets a catalyst for turnaround," said Savanth Sebastian, equities economist with Commonwealth Securities in Sydney.
The online prediction market Intrade reflected a 72 percent chance Congress would approve the White House bailout plan by September 30, down from a better than 90 percent chance on Thursday. Many congressional officials will leave at the end of the month to campaign for the presidential election in November.
