Stocks slipped and the yen rose on Wednesday after news Bank of America needs $34 billion in extra capital startled investors who had grown more comfortable with risk ahead of official results of stress tests on U.S. banks due on Thursday.

U.S. S&P 500 futures were down 1 percent, indicating a lower market open later in the day on Wall Street, after a source familiar with the government tests on 19 banks told Reuters that Bank of America required additional capital worth nearly half its market cap of $69.4 billion.

Major European stock markets were expected to open as much as 0.5 percent lower, according to financial bookmakers, in the wake of the Bank of America headlines.

The yen strengthened across the board as dealers sought its relative safety, knocking the Australian dollar down 1.3 percent against the yen despite stronger-than-expected Australian retail sales numbers.

This could put a dent in the rally we've seen, said Jan Lambregts, head of Asia research at Rabobank in Hong Kong. Definitely we'll have a breather until we get these (stress test) results. Perhaps there are a few surprises in there, Lambregts said.

Still, the fallout from the Bank of America news was limited by optimism about the global economy, particularly after several Federal Reserve officials this week, including Ben Bernanke, said the U.S. recession should end this year.

The MSCI index of Asia Pacific stocks <.MIAPJ0000PUS> outside Japan fell 0.4 percent, after hitting a seven-month high on Tuesday. Cyclical sectors, such as energy and materials in addition to financials led the index lower.

The all-country world index <.MIWD00000PUS> climbed to a four-month high on Tuesday.

Japan's markets were closed for a holiday.

Hong Kong's Hang Seng index <.HSI> was up 0.2 percent in choppy trading. A 2.4 percent rise in HSBC stock <0005.HK> was enough to offset weakness in index heavyweight China Mobile <0941.HK>.

Bank of America has been at the top of the list of banks believed to need more cash to survive credit losses. The $34 billion number caught many dealers off guard because it triples the previously published reports of the firm's capital needs.

Taiwan's stock market outperformed the region, with its benchmark <.TWII> rising 2.3 percent and extending last week's rally on hopes of closer investment ties with China.


Investor willingness to take risks in search for higher returns has been steadily increasing over the last few months in response to evidence around the world the global economic downturn is easing. Signs that China's manufacturing sector is revving up have spurred hopes of a revival among Asia's other exporters, and even the downturn in the U.S. housing market may have stabilized.

Greater acceptance of risk has prompted a rally in equities, commodities, emerging market debt and high-yielding currencies. Uncertainty over the stress test results may put the climb on pause, but was unlikely to reverse it, analysts said.

In the short term, fundamentally, a correction is overdue and U.S. bank stress test results could well become a trigger as they will reveal capital needs without any real immediate remedy, said Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong.

However, market positioning is likely to trump fundamentals, and it seems real money is coming out of the trenches, he said in a note.

The U.S. dollar was down about 0.7 percent against the yen to 98.22 yen, but was higher against the euro and emerging Asian currencies, benefiting from a rush to liquidity.

The euro was down around 0.3 percent to $1.3265, ahead of a European Central Bank policy meeting on Thursday at which the ECB is expected to cut rates to 1 percent.

High-grade credit spreads in Asia widened slightly on the Bank of America news, though they remained near the tightest levels since October, the Asia iTraxx investment-grade index showed.

Indeed, though traders were having to deal with leaks on the bank stress test results in the near term, investors with a longer-time horizon were probably comforted by signs the financial crisis was easing.

For example, the VIX index <.VIX>, a standard gauge of financial market volatility, fell on Tuesday to its lowest since late September. And 3-month LIBOR fell below 1 percent for the first time after spiking to as high as 4.8 percent in the wake of the collapse of Lehman Brothers last year.

U.S. crude for June delivery was largely unchanged at around $53.80 a barrel after rising to a high for the year overnight of $54.83.

(Editing by Tomasz Janowski)