Asian stocks slipped on Tuesday, snuffing a five-day rally as uncertainty about U.S. banks pushed dealers to take profits on recent gains, while investors' reduced willingness to take risks lifted the U.S. dollar and yen.
Gloomy comments from high-profile U.S. bank analysts overnight, as well as a dark prognosis on the financial system from billionaire investor George Soros, weighed on Wall Street and supported gold prices.
Adding to unease about the financial sector, the International Monetary Fund is expected to report in coming weeks that a deterioration in U.S. bad assets could increase to as much as $3.1 trillion, far more than the $2.2 trillion the institution had earlier forecast, The Times newspaper reported in Britain.
The global banking system and financial markets are likely to remain on shaky ground, impeding hopes for economic recovery, until the mountain of bad loans, mortgages and financial derivatives is cleared.
The market's stance on banks had been too optimistic recently, said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo. Some large U.S. banks have already passed stress tests, but others haven't, and given that results are coming up soon, this simply reignited investor uncertainty.
Even before the comments on banks, stock traders wondered when the market would pause for breath after a 10 percent rally in the last five days pushed a benchmark Asia ex-Japan equities index up against a major technical obstacle on the charts.
The MSCI index of Asia Pacific stocks outside Japan fell 1.2 percent, after briefly touching a six-month high on Monday. The index, now at 264.30, has not been able to clear 270 since October 2008.
In Japan, shares of top bank Mitsubishi UFJ Financial Group <8306.T> were down 1.4 percent and Shinsei Bank <8303.T> was off 3.7 percent.
The Nikkei share average <.N225> was largely unchanged with weakness in bank stocks offset by strength in automaker shares, which have continued to gain on hopes General Motors
Bank stocks were also under fire in Australia, where National Australia Bank
The benchmark S&P/ASX 200 index <.AXJO> fell 0.9 percent after hitting a three-month high on Monday.
Hong Kong's Hang Seng index <.HSI> slid 1.4 percent, led by HSBC stock <0005.HK>, which dropped 2.3 percent.
WILL THE RBA STAY PUT?
The yen and the dollar climbed, benefiting from defensive position-taking as the optimism that powered a recent rally in stocks and higher-risk currencies gave way to caution about banks.
The dollar slipped 0.2 percent to 100.79 yen, after rising above 101.40 yen on Monday, the highest since late October. The dollar has strengthened by some 12 yen since February, as more investors dump the what has been considered relative safety in the yen for higher returns elsewhere.
The euro fell 0.4 percent on the day to $1.3358 and was down 0.6 percent to 134.65 yen, after hitting a near six-month high on Monday.
The relationship has been firmly set that the U.S. dollar strengthens during episodes of risk aversion. Last week's rally in equity markets was certainly of questionable sustainability given it was in part fueled by changes to accounting law, said Ashley Davies, currency strategist with UBS in Singapore in a note.
The focus during the Asian trading day was on a policy decision from the Reserve Bank of Australia, which is expected to keep rates on hold at 3.25 percent, according to a Reuters poll, though it was a close call.
The RBA surprised markets in March by pausing and other central banks, including the European Central Bank, have since either left rates on hold or cut by less than expected.
A cut by the RBA when some are expecting the central bank to hold steady may send a message of concern about tentative signs that the economic downturn may be bottoming out across the region.
With risk taking a back seat, gold prices in the spot market fell 0.8 percent to $875.55 after dipping to a near three-month low overnight.
U.S. crude for May delivery was stable around $51 a barrel ahead of weekly U.S. inventories data. Oil prices have been tracking rallying equity markets and have gained around $15 since mid February.
The U.S. government bond market continued to be mostly governed by expectations about upcoming supply and whether demand would hold up.
The yield on the U.S. benchmark 10-year note was at 2.91 percent, dipping from 2.94 percent where it ended New York trade.