By Chikako Mogi
TOKYO (Reuters) - Asian shares fell to a fresh 9-1/2-month low on Monday as investors worried about China's economic and financial stability and markets scrambled to price in the Federal Reserve's plan to tone down its stimulus drive starting later this year.
MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> slipped 1.2 percent to its lowest since early September, after posting its worst week since May 2012 with a drop of 4.5 percent last week.
China's money market rates remained elevated and volatile, keeping investors jittery about the intentions of the Chinese authorities, as the recent spike in market rates compounds fears of a sharper-than-expected slowdown in the world's second-largest economy.
China's weighted average overnight bond repurchase rate, a measure of the cost of funds, fell to a low of 6.1 percent earlier in the day but briefly crawled back up again to 9.1 percent, slightly above Friday's close at 8.89 percent.
China shares extended losses with banks leading the downward spiral after official news reports over the weekend suggested Beijing will crack down on shadow banking, blamed for the cash crunch in the mainland. Hong Kong shares <.hsi> fell 1.4 percent and Shanghai shares <.ssec> shed 2.1 percent, with the financials sub-index tumbling nearly 6 percent.
Many analysts saw the People's Bank of China's withholding of money market funding as a strategy to force banks to stop channeling cash into the informal banking sector, known as shadow banking, which authorities worry is creating significant credit risks.
"The Chinese authorities are purposefully doing this to let investors be aware of pains that must accompany structural reforms the government is trying to pursue, so investors shouldn't be complacent about the government avoiding a hard landing," said Xiao Minjie, an independent economist in Tokyo.
Australian shares <.axjo> tumbled 1.6 percent, weighed by concerns about slowing China growth, while South Korean shares <.ks11> fell 0.7 percent, extending Friday's losses to a fresh 11-month low.
Japan's Nikkei stock average <.n225> gave up early gains on the back of a weaker yen as investors remained skittish after last week's global market rout. It was marginally weaker by midday.
"The weaker yen certainly is the main driver today. Nevertheless, investors are hesitant to buy into exporters because the external situation, especially that of the emerging markets, is uncertain," said Ryota Sakagami, chief strategist at SMBC Nikko Securities.
DOLLAR SOLE OUTPERFORMER
Financial markets sold off last week after Fed Chairman Ben Bernanke said that with the U.S. economy showing signs of recovery, the central bank may start scaling back its huge monthly bond-buying plan which was aimed at keeping bond yields down and supporting the economy. The Fed's strong accommodative stance has also encouraged investment in riskier assets such as shares.
"The valuation adjustment for tapering of Fed stimulus is well underway," said Ric Spooner, chief market analyst at CMC Markets.
The dollar was the sole outperformer, gaining broadly amid improving U.S. economic prospects and rising yields.
The dollar was up 0.4 percent against the yen at 98.25, slowly extending gains and moving away from its 10-week low of 93.75 yen hit earlier in the month.
Traders said the prospect of diverging yield directions will support the dollar against the yen.
U.S. Treasuries prices slipped in Asia on Monday, extending last week's dismal performance with the benchmark 10-year yield posting its biggest weekly rise since November 2001 after the Federal Reserve signaled it might scale back its stimulus.
The yield on 10-year notes added 2.6 basis points to 2.5684 percent, its highest in almost two years.
"A better economic outlook will eventually need to be priced into the short end of the yield curve. This suggests that there is a catch-up trade for the USD versus low-yielding currencies (such as the yen)," Barclays Capital said in a research note.
Against a basket of major currencies, the dollar index <.dxy> rose 0.32 percent to a two-week high after ending last week up 2.2 percent for its biggest weekly gain since early November, 2011.
Spot gold fell 0.4 percent to $1,291.65 an ounce, after touching its lowest since September 2010 of $1,268.89 on Friday and ending the worst week in nearly two years.
U.S. crude futures eased 0.2 percent to $93.55 a barrel and Brent fell 0.3 percent to $100.60.
Going into the Fed's June meeting, investors continued to take money out of emerging-market fund groups in the week ending June 19, with redemptions from EPFR Global-tracked emerging markets bond funds hitting a 90-week high and more than $3 billion leaving emerging markets equity funds, EPFR said on Friday.
(Additional reporting by Thuy Ong in Sydney and Tomo Uetake in Tokyo; Editing by Eric Meijer)
Source: http://news.yahoo.com/fed-outlook-bolsters-dollar-caps-asian-shares-003746943.html
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