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Global stocks slip as US bailout questioned

Analysis

Asian stocks slid on Tuesday on skepticism about how Washington's $700 billion bailout plan can restore confidence in the US financial system when the economy may be in a recession, boosting gold and government debt.

The US dollar stabilized after tumbling to a six-week low against the euro overnight as oil prices soared. Initial exuberance about Washington's answer to the financial crisis, which is being fought over in Congress, faded and fears arose about rising costs exploding the US budget deficit.

Crude oil futures were down slightly below $109 a barrel, after rising nearly $5 overnight on the weaker dollar. Higher energy prices lent support to the skeptics about the cost of what will likely be the biggest US bailout ever.

“The combination of a weaker dollar and higher risk aversion and lower Treasury yields suggests very strongly that the market is questioning whether the Treasury plan will be implemented in its current form,” said Ashley Davies, currency strategist with UBS in Singapore, in a note.

The MSCI index of Asia-Pacific stocks outside of Japan slipped 1.5%, though it remained well above a two-year low hit on Thursday.

Australia's benchmark S&P/ASX 200 index was down 1.9%, with bank stocks and shares of mining firm BHP Billiton the biggest drag.

The country's regulator eased a total ban on short selling, allowing selected use of the strategy. However, investors wondered if such restrictions put into effect around the world would have much of a chance in stopping heavy selloffs.

“I don't think stopping short selling has stopped our market from falling,” said Tom Elliott, managing director of hedge fund MM&E Capital in Melbourne. “If the US bailout plan falls apart, which it's showing signs of doing, then the markets will go down again,” Elliott said.

Hong Kong's Hang Seng index dropped 2% but it traded well above the two-year low hit on Thursday. Shares of China Mobile and HSBC were the heaviest weights on the index.

Japan's market was closed on Tuesday because of a holiday.

Investors have sought refuge from soaring financial market volatility in gold. After jumping more than 3% on Monday, the precious metal was up 0.2% to $901.85 an ounce after earlier touching a seven-week high of $908.80.

Risk taking among investors, which usually benefits emerging market assets, non-investment grade debt and higher-yielding currencies, has been recovering only in patches since the US government began an all-out assault on stemming the financial crisis late last week. Washington has opened up its own balance sheet to illiquid assets, banned some short-selling and rescued companies and money market funds.

Some signs show improved liquidity conditions in money markets, with the overnight US dollar borrowing rate stable around 2.25% and 3-month and 6-month US Treasury bill yields climbing above 1%.

However, many market participants remain shellshocked after the last two extraordinary weeks in which Fannie Mae and Freddie Mac were effectively nationalized, Lehman Brothers filed for bankruptcy, Washington bailed out insurer American International Group and Bank of America bought Merrill Lynch.

The euro was down 0.2% at $1.4770 after having hit a six-week high around $1.4865 overnight and staged its biggest one-day gain since its inception in January 1999.

The dollar slipped 0.1% to ¥105.33, but remained down 5.4% on the year.

The 10-year US Treasury note yield, which moves in the opposite direction of the price, slipped to 3.835% after rising to 3.85% late on Monday in New York.

The 2-year yield fell to 2.13% from 2.19%.

The November US light crude contract was down 52 cents to $108.85 a barrel though has risen for the last four days. In its last day before expiry, the previous October contract jumped almost 16% to over $120 a barrel on Monday, its biggest one-day gain on record, as the dollar weakened. (Reuters)

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