Asian Shares End Lower; Banking, Resource Stks Lead Losses

Asian share markets finished broadly lower Tuesday, led by losses in banking and resource stocks with investors wary that tentative signs of economic recovery don’t match the scope of the recent gains in regional stock markets.

Japan’s Nikkei 225 closed 2.9% lower at 9752.88, retreating from Friday’s eight-month high above 10,000. Hong Kong’s Hang Seng Index closed off 1.8%, but is still up over 8% in a month. The Shanghai Composite lost 0.5%. Korea’s Kospi Composite finished with a loss of 0.9% - but is up 24% year to date. Taiwan’s main index fell 0.1% and Australia’s S&P/ASX 200 declined 1.7%.

“Markets are reassessing the magnitude of the rally in Asian currencies and stocks against the background of a cautious outlook in the months ahead,” said Mitul Kotecha, head of global FX Research at Calyon.

“Take profit whenever you can, as the rally has been too quick, too fast, in too short a time,” said Gabriel Yap, senior dealing director at DMG & Partners. It’s “great now that the correction has kicked in.”

The losses in Asia followed a 2.1% decline in the Dow Jones Industrial Average Monday, the index’s biggest loss in a month, with sentiment blighted by weak manufacturing and housing data.

In Tokyo Tuesday, the Bank of Japan raised its assessment of economic conditions for a second time this year, acknowledging that economic conditions have “begun to stop worsening.” The central bank’s monetary policy board also kept its interest-rate target at the current 0.1% level, as had been widely expected.

Investors in Japanese shares appeared unfazed by the upbeat assessment. Financials were weak with Mitsubishi UFJ FG closing down 4.8% and Mizuho Trust & Banking down 5%. Real estate firms were particularly hard hit coming off a four-session, 11% rally - Mitsui Fudosan down 6.4%, Mitsubishi Estate off 6.6% and Sumitomo Realty & Development down 5.6%.

Signs that exuberance on the economy may be premature drove base metals lower Monday, resulting in weakness in commodity stocks in Asia Tuesday. Prices for oil futures posted a two-session loss of nearly 3% in New York.

On Globex late Tuesday in Asia, July crude was down 14 cents at $70.48 per barrel after earlier dipping as low as $69.90. July copper fell as much as 2% to a low of $2.24 per pound, but August gold was up $4.50 at $932 per ounce after Monday’s slide in New York.

Against that backdrop, mining and energy stocks were the major losers in Hong Kong with PetroChina 2.6% lower and Aluminum Corp. of China down 3.5%. In Australia, BHP closed down 1.5%, Rio Tinto down 3.2% and Woodside down 3.1%.

Nufarm dropped 12.7% in Sydney after the group issued a profit warning, less than a month after raising capital in an institutional share placement.

Australian financials also weakened with Westfield down 3.2% and ANZ down 2.7%. In Korea, KB Financial lost 0.5%.

“U.S. markets seem to be getting more sensitive to negatives than positives after hitting their short-term peaks, indicating strong profit-taking demand. This will likely lead foreign investors to look for chances to book profits in emerging markets,” said Oh Tae-dong at Taurus Investment & Securities.

In Seoul, there appeared to be no major reaction to the decision by index provider MSCI to keep the country on a waiting list for a potential upgrade to developed status from emerging market status. Some analysts said such a move was unlikely for now given MSCI’s concerns about issues including constraints on trading the Korean won.

Shares of MediaTek lost 4.8% in Taiwan after a Commercial Times report that the chip designer giant had lowered its third-quarter output estimate.

Singapore Airlines’ lower passenger and cargo traffic figures for May concerned investors at a time of rising jet fuel prices and the spread of the H1N1 virus. In late afternoon trading, the stock lost 1.6%. Singapore’s Straits Times Index was down 1.3% in late trading, with Malaysia’s main index down 1.3% and Indonesian shares off 2.4%. India’s Sensex was trading 0.5% higher. Philippine shares finished 3.8% lower.

In currency markets, the euro bounced off some early Asia weakness against the U.S. dollar, and was buying $1.3810 from $1.3796 in New York.

The U.S. dollar weakened against the yen after the Bank of Japan’s economic assessment, with the greenback changing hands at Y96.59, down from Y97.84 in New York.

“We are still positive on Asian currencies in the months ahead, but it appears that the rally has been overdone and economic data in Asia has not justified such a rally, suggesting some downside risks over the short term,” said Calyon’s Kotecha.

For all of history through the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop…gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.