Asian stocks slide as inflation fears rise

Asian stocks fell on Monday, with shares in Japan suffering their biggest fall in six weeks, as investors feared rising inflation and sluggish US economic growth would seriously dent consumer demand in the region's biggest export market.

Oil prices edged higher as the dollar eased, but trade in Asia was subdued with the US and UK financial markets closed on Monday for national holidays.

Major stock indexes in Japan and China dropped more than 2 percent after US markets last week chalked up their biggest decline in three months as oil prices rocketed to record highs, heightening concern about consumer demand and company earnings.

"The market is going to start thinking about real economies. China has held up somewhat but margins are getting squeezed by higher oil and higher materials prices," said Garry Evans, pan-Asian equity strategist with HSBC in Hong Kong.

By 0600 GMT, Japan's Nikkei share average posted its largest single-day decline in six weeks, down 2.3 percent, led lower by exporters such as Canon Inc and clothing firm Fast Retailing Co Ltd

The MSCI index of Asian stocks outside Japan fell 1.4 percent.

China Mobile stock tumbled 7.5 percent, helping to knock down Hong Kong's Hang Seng index after Goldman Sachs downgraded shares of the world's largest wireless carrier to "sell" following a sector-wide restructuring plan announced last week which will increase competition.

South Korea's KOSPI slid 1.5 percent to its lowest since April 24. Shares of Samsung Electronics Co Ltd, the world's second-largest mobile phone maker, were the biggest drag on the index, tumbling 4 percent, on talk that Nokia may cut prices and re-enter the South Korean market.

Investors are also awaiting inflation data from both the euro zone and United States later in the week.

A persistent rise in commodity prices, led by oil's 38 percent climb so far this year, has spooked investors and brought an abrupt end to a rally in global stock markets that began in mid-March when the US Federal Reserve backed a deal to bail out ailing investment bank Bear Stearns & Co Inc

Still, the overarching trend since March has been a cautious shift from bonds to stocks despite higher volatility in both equity and fixed income markets.

Emerging market equity funds have received $16.7 billion in fresh investment since the beginning of April, recouping all but $3.3 billion of the losses incurred during the first three months of the year, according to data from EPFR Global, a firm that tracks global capital flows.

Meanwhile, investors have pulled money out of global bond funds for 15 consecutive weeks, racking up outflows of $10.5 billion so far this year.

BEAR MARKET IN BONDS

Inflation fears caused a stampede out of US Treasuries last week, pushing up the yield on the benchmark 10-year note by 11 basis points. The sell-off quickly spread to Asia as well.

Japanese government bond futures on Monday edged up from nine-month lows plumbed last week, but gains were tempered by many market players, especially large banks, looking to cut their holdings.

"Market sentiment is pretty bad," said Kenro Kawano, senior interest-rate strategist at Credit Suisse in Tokyo. "At least at the moment, it's a bear market."

Kawano said the surge in oil prices would ultimately hurt the Japanese economy. If so, that should cool some of the expectations for the Bank of Japan to raise interest rates in the coming year, which have weighed on the bond market.

June 10-year futures edged up 0.13 point to 134.48, up slightly from the nine-month trough of 133.93 struck on Friday.

The benchmark 10-year yield which moves inversely to the price, was steady at 1.74 percent, off the nine-month peak of 1.755 percent reached on Friday.

Oil rose towards $133 a barrel on Monday, extending the previous session's gains on a supply outage at the Statfjord oilfield in the North Sea and the weak US dollar.

US light crude for July delivery rose 54 cents to $132.73 a barrel, extending Friday's gains of $1.38. It struck a record high of $135.09 in intraday trade last week which will increase competition.

Gold prices have crept higher in May, reflecting investors' unease about inflation. Spot gold on Monday was up 0.3 percent at $927.10 an ounce.

The ailing dollar eased 0.1 percent to 71.888 against a basket of major currencies, hovering near one-month lows.

The euro rose to $1.5790 up 0.2 percent from Friday. It hit all-time highs above $1.60 last

The dollar slid 0.2 percent against the Japanese currency to 103.15 yen as a fall in Tokyo stocks prompted investors to unwind risky carry trades. In carry trades, low-yielding currencies such as the yen are used to finance purchases of assets offering higher returns elsewhere.

"The dollar continues to stay on a downward trend with many players just looking for a chance to sell it," said Tsutomu Soma, senior manager of foreign assets at Okasan Securities in Japan.