Asian stocks fell by up to 5 percent on Tuesday as prospects of a deep global recession and the biggest job cut plan in history at Citigroup doused expectations for a financial sector recovery in 2009.
Major European stock market futures shed as much as 0.6 percent in early trade, following losses in Asia and U.S. markets. S&P 500 futures were down 0.8 percent.
Despite relatively stable conditions in short-term credit markets, banks were struggling to contain climbing losses on bad loans, with Citi, the second-largest U.S. bank, reducing 15 percent of its workforce in a dramatic move to save itself.
HSBC also laid off an additional 500 staff in Asia after announcing 1,100 job cuts in September.
China Construction Bank saw its shares tumble nearly 10 percent as investors gave a resounding thumbs down to Bank of America's deal to boost its stake in China's third-biggest bank at a significant discount to the current share price.
"Investors find it hard to invest in the financial sector unless signs emerge that the global economy has started to improve," said Kazuhiro Takahashi, general manager of the equity marketing department at Daiwa Securities SMBC in Tokyo.
Rising unemployment is a painful reminder of how the brutal trend of slashing away risk in investor and institutional portfolios, which has been a key factor in erasing about $7 trillion from global equity market cap so far this year, has far-reaching consequences beyond just financial markets.
Meanwhile, the South Korean won was on track for a sixth straight day of losses against the U.S. dollar, which held broadly firm as investors continued to seek safety in the world's foremost reserve currency.
CONCERN OVER FINANCIALS
Asia-Pacific stocks outside of Japan fell 4.9 percent, bringing year-to-date losses to near 60 percent, according to an MSCI index Asia's losses have outpaced the all-country world index, which is down 47.5 percent in 2008.
Hong Kong's Hang Seng index dropped 5.95 percent, with shares of commodity-related companies suffering double-digit losses. Shanghai's China composite index tumbled 6 percent, dragged down by the property sector.
Japan's Nikkei share average finished down 2.3 percent, led by a 15 percent plunge in Softbank Corp, the country's third-biggest mobile phone operator.
Shares of Mitsubishi UFJ Financial Group (MUFG), Japan's largest bank, were down 6.7 precent after Citigroup's massive layoff plan reignited fears about the financial industry's stability.
The overriding concern among investors with banks, as it has been since day one of the financial crisis, is whether they are adequately capitalised.
Indeed, shares of Macquarie Group, Australia's biggest investment bank, actually surged 16.5 percent on relief they firm did not announce any capital raising initiatives, though it was heading for its first decline in annual profit since 1992.
Falling 2009 economic growth expectations have been feeding through to financial and commodity markets as investors price in much slower demand next year. Japan's Economics Minister Kaoru Yosano said it was hard to expect the world's No. 2 economy to log positive growth in the next fiscal year starting in April.
However, some large investors have begun to look cautiously for value amid the wreckage. Bob Doll, global chief investment officer of equities at BlackRock Inc, noted the dividend yield on the U.S. S&P 500 index last week was higher than the yield on the 10-year U.S. Treasury note — the first time that has happened in nearly 50 years.
"To us, this suggests that valuation levels are helping to create a floor for equity prices," he said in a note.
SELECTIVE BUYING
John Paulson, a hedge fund manager who gained a superstar reputation after early on betting big against the U.S. housing market, told the Financial Times he has started to buy securities backed by residential mortgages.
Despite the very selective buying in some markets, most investors were still locked into recession trades, one of which has been to buy U.S. dollars as well as yen.
The U.S. dollar edged up 0.2 percent to 96.66 yen while the euro was little changed at 121.96 yen The euro eased 0.2 percent to $1.2620
The Korean won was quoted at 1,447.90 per U.S. dollar, compared with Monday's domestic close of 1,409.0.
The South Korean currency has lost more than a third of its value against the dollar this year on expectations global economic turmoil would worsen the country's international balance of payments and economic growth.
Two-year Japanese government bond yields hit an eight-month low on Tuesday following a dip in JGB repo rates this week and on market expectations for the Bank of Japan to keep interest rates low in coming months.
Two-year JGB yields dipped 0.5 basis point to 0.515 percent the lowest since March.
U.S. crude for December delivery rebounded 42 cents at $55.37 a barrel, after settling down $2.09 at $54.95 on Monday, the lowest settlement since late January 2007 as worries about the economic outlook in the United States and Japan stoked concerns about global fuel demand.
