Panic strangles Asia stocks; yen firm

HONG KONG (Reuters) - Asian stocks plunged on Friday, with Japan's Nikkei down more than 10 percent, while the yen and U.S. Treasury debt prices rose, as panic set in after global efforts so far failed to unlock credit markets.

A synchronized cut in borrowing costs by central banks around the world this week was seen as too little, too late, and investors doubted a meeting of the Group of Seven rich nations later on Friday could achieve much, with fears growing that the global economy is headed toward recession.

U.S. government debt and the yen have become refuges from the worsening financial crisis that overnight knocked the U.S. S&P 500 stocks index down 7.6 percent to a 5-year low. But cash was ultimately king, with even Japanese government bonds being liquidated for funding.

Fears of a sharp slowdown in demand for raw materials from heavy consumers like China and the United States dragged oil prices down to a 12-month low below $83 a barrel.

"It's impossible to predict the bottom, and technical analysis is meaningless as panic and fear overwhelm the markets," said Jang Huh, managing director at Prudential Asset Management in Seoul.

The Nikkei share average was down 10.1 percent, bringing the week's losses to more than 20 percent.

Unlisted Yamato Life Insurance Co filed for bankruptcy protection because of market turmoil, shocking investors who had thought Asia's financial sector, especially Japan's, was relatively stable compared with Europe and the United States.

The MSCI index of Asia-Pacific stocks excluding Japan was down 7.7 percent to its lowest since January 2005, and has fallen 21 percent this week alone. The all-country world stocks index fell to the lowest since November 2003.

Hong Kong's Hang Seng index dropped 7 percent to a near three-year low. The market value of companies listed on the index has lost almost half its value since the year began.

Singapore's Straits Times index fell more than 6.6 percent, and data confirmed one of Asia's richest economies was in a recession.

The Chicago Board Options Exchange Volatility index (VIX), seen as a gauge of investor fear, hit an all-time high of 64.92, as investors scrambled to buy increasingly expensive protection against erratic price action.

With global equity markets declining with brutal swiftness, investors have rushed to U.S. Treasury debt despite weakness in recent days on expectations for a glut of new issuance.

The 10-year note rose 6/32 in price, taking its yield to 3.76 percent from 3.78 percent. Rates on one-month T-bills fell to just 0.046 percent, from 0.080 on Thursday and 1.55 percent as recently as September 11, as the very short end of the market continued to act as a source of funding with other avenues all but shut down.

WHAT MORE CAN BE DONE?

Credit markets were nearly broken. The cost of protection against defaults in Asia's sovereign and corporate debt soared to record highs, traders said.

The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion for the region's "junk"-rated credit, soared about 90 basis points to a record 890/940 bps, a Singapore-based fund manager said. But traders warned of little activity in the credit markets, which tends to magnify price differences.

Extreme market volatility stoked talk that the major central banks would have to reduce interest rates again, just days after a concerted round of cuts led by the Federal Reserve and European Central Bank. There were also reports the U.S. Treasury was under intense pressure to inject funds directly into commercial banks.

"It highlights the enormity of the issue and the problem faced by the G7," said Adam Carr, a senior economist at broker ICAP in Sydney. "Given the muted response in markets, certainly I think more rate cuts are to come, as ineffective as they are proving. Lets hope the G7 propose a good dose of fiscal medicine to the real economy as well."

Whether or not global policymakers have anything more planned, time was running thin.

The spread of 3-month London interbank offered rates over the 3-month U.S. Treasury bill yield widened to 426 bps, increasing more than 300 bps in the last month, with cash being hoarded and practically no lending between banks.

Japanese government bonds plunged as much as 1.99 points to 136.47, with investors in a frantic rush to secure cash with domestic money markets succumbing to the freeze around the world.

The euro slid to a three-year low of 132.80 yen before trimming losses to 133.88 yen. The U.S. dollar hit a six-month low of 97.91 yen before clawing back to 98.97 yen.

U.S. crude oil futures fell 5.2 percent to a 12-month low of $82.10 a barrel on concerns the growing financial crisis would sap fuel demand from countries like China.

The slowdown in the country's property and manufacturing sectors means it will take time to work through its metals and other raw materials stockpiles.

"With a steady stream of negative news dampening sentiment across the commodities complex, market players are hoping for supportive government measures to arrest the decline in commodity and equity prices," said Jing Ulrich, managing director and chairman of China equities with JPMorgan in Hong Kong.

Spot gold rose $2.50 to $914 an ounce as investors search for assets that might be safe havens from the sharp fall on equity markets.