Asian Stocks Drop to Two-Month Low as Europe Debt Crisis Deepens

Asian stocks dropped, with the regional benchmark index set for its biggest decline since March 15, as Fitch Ratings cut Greece’s credit rating and Standard & Poor’s said Italy’s rating was at risk, deepening concern over Europe’s sovereign debt crisis.

Esprit Holdings Ltd. (330), the Hong Kong-based clothier that counts Europe as its biggest market, dropped 4 percent. Canon Inc. (7751), the world’s largest manufacturer of cameras, lost 1 percent in Tokyo. Tokyo Electric Power Co., owner of the nuclear reactor crippled by the March earthquake, slumped 9 percent after posting a record loss. BHP Billiton Ltd. (BHP), the world’s largest mining company and Australia’s biggest oil and gas producer, declined 1.7 percent in Sydney.

The MSCI Asia Pacific Index fell 2.2 percent to 131.67 as of 7:19 p.m. in Tokyo, heading for its lowest close since March 21. Almost nine stocks fell for each that rose. The gauge declined 1.1 percent last week, its third straight week of declines and the longest streak of weekly losses since November, as Greece’s debt crisis grew, Japan’s economy contracted and disappointing U.S. economic data fueled concern about a global recovery.

“The biggest concern about Europe is the risk of contagion and of credit markets drying up globally,” said Prasad Patkar, who helps manage about $1.8 billion at Platypus Asset Management Ltd. in Sydney. “The memory of the global financial crisis is fresh in everyone’s mind, and everybody’s preference is that we don’t go there again.”

Japan’s Nikkei 225 (NKY) Stock Average dropped 1.5 percent. South Korea’s Kospi Index retreated 2.6 percent. China’s Shanghai Composite Index slipped 2.9 percent, while Hong Kong’s Hang Seng Index declined 2.1 percent. Australia’s S&P/ASX 200 Index decreased 1.9 percent.

Vietnam Tumbles

Vietnam’s VN Index tumbled 3.5 percent to its lowest close since July 2009. The gauge had the biggest decline among benchmark indexes in the Asia-Pacific region after news reports that the nation’s inflation may accelerate faster than previous estimates.

Futures on the Standard & Poor’s 500 Index dropped 0.9 percent today. In New York, the index lost 0.8 percent to 1,333.27 on May 20 after Gap Inc. cut its earnings forecast and concern grew that Greece will default.

Fitch Ratings cut Greece three levels to B+, four steps below investment grade, from BB+. Fitch said even a “soft” restructuring of debt being studied by European Union policy makers would be considered a default. Fitch said Greece could face a further reduction in its creditworthiness.

‘Collateral Damage’

“Greece has a disproportionately large ability to cause a lot of collateral damage,” said Platypus’ Patkar. “Credit is a very important mechanism for quickly transmitting malaise around the world. If Europe’s problems affect credit markets generally it has the ability to derail the global economic recovery.”

Europe’s debt crisis is not limited to Greece. Italy’s Treasury said it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014 after Standard & Poor’s said its debt rating is at risk of a downgrade.

Spanish Prime Minister Jose Luis Rodriguez Zapatero led his Socialist party to its worst defeat in more than 30 years in local elections, prompting a transfer of power in Spain’s region that risks reviving concerns over the country’s public finances.

Esprit, which gets about 83 percent of sales from Europe, declined 4 percent to HK$29.15 in Hong Kong. Cosco Pacific Ltd. (1199), which operates container facilities at Piraeus, Greece’s largest port, dropped 3.4 percent to HK$15.30. Canon, which counts Europe as its biggest market, slipped 1 percent to 3,660 yen in Tokyo.

Biggest Decline

Tokyo Electric slumped 9 percent to 334 yen in Tokyo, the second-biggest decline in the regional benchmark index. The company reported a loss of 1.25 trillion yen ($15 billion), the biggest for a non-financial Japanese company, as it booked a 1.1 trillion yen charge related to costs for the worst nuclear accident since the 1986 explosion at the former Soviet Union’s Chernobyl nuclear power plant.

Japanese makers of construction machinery fell after Nomura Holdings Inc. reduced its estimate for sales of the equipment in China by 20 percent in the year ending in March 2012 as government measures to cool an overheated Chinese economy will likely weigh on demand in the construction industry. China’s manufacturing may expand at a slower pace this month, a preliminary reading of a purchasing managers’ index showed.

Komatsu Ltd. (6301), the world’s second-biggest maker of construction machinery, plunged 5.9 percent to 2,381 yen. Hitachi Construction Machinery Co. declined 6 percent to 1,676 yen. Kobe Steel Ltd. dropped 3.8 percent to 176 yen. Kawasaki Heavy Industries Ltd. lost 4.9 percent to 291 yen.

Nomura cut its share-price estimate on Komatsu by 11 percent and lowered its ratings on companies including Hitachi Construction, Kobe Steel, and Kawasaki Heavy.

Airlines Drop

Airlines dropped after a volcanic eruption in Iceland threatened trans-Atlantic air traffic. An ash plume from the Grimsvotn chamber, Iceland’s most active volcano, may reach the U.K. this week, according to the nation’s weather office. The explosion of Eyjafjallajokull, another volcano, on April 14, 2010, closed European airspace for six days, grounding 100,000 flights at a cost of $1.7 billion, according to an estimate then by the International Air Transport Association.

Cathay Pacific Airways Ltd. (293), Hong Kong’s biggest carrier, dropped 2.8 percent to HK$18.04. Singapore Airlines Ltd. (SIA), the world’s second-largest airline by market value, slid 2.1 percent to S$14.14. Korean Air Lines Co. slumped 3.5 percent to 65,500 won in Seoul.

Hyundai Motor Co. (005380), South Korea’s largest carmaker, plunged 5.4 percent to 228,000 won, the worst performance since Oct. 18, after saying in a statement strike action at a supplier of piston rings and cylinder liners may halt production of engines for some models including Hyundai’s Santa Fe and affiliate Kia Motors Corp.’s K5. Kia dropped 4.7 percent to 69,100 won, the lowest level since April 4.

Materials Producers Retreat

Raw material producers dropped after oil and copper futures declined on speculation demand will weaken as Europe’s debt crisis deepens. Crude oil for July delivery fell as much as 2.5 percent to $97.64 a barrel today on the New York Mercantile Exchange. Copper for three-month delivery slid as much as 2.3 percent to $8,864 a metric ton on the London Metal Exchange.

BHP Billiton lost 1.7 percent to A$43.29 in Sydney. Rio Tinto Group, the world’s second-largest mining company by sales, retreated 1.5 percent to A$78.99. Jiangxi Copper Co., China’s biggest producer of the metal, declined 1.8 percent to HK$24.30 in Hong Kong. Cnooc Ltd., the nation’s No. 1 offshore energy explorer, fell 1.5 percent to HK$17.86.

The MSCI Asia Pacific Index lost 2.2 percent this year through May 20, compared with gains of 6 percent by the S&P 500 and 1.4 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 13.5 times estimated earnings on average, compared with 13.4 times for the S&P 500 and 11.2 times for the Stoxx 600.

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net;

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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