Stocks surge, yen falls as risk taking improves

HONG KONG (Reuters) – Asian stocks rose for a third day on Thursday, led by a 12 percent surge in South Korea, on international efforts to provide liquidity to emerging markets and global prospects of lower borrowing costs.

A woman walks past an image of the Japanese yen's exchange rate against the U.S. dollar projected on a wall at a foreign exchange retail trading company in Tokyo October 29, 2008.

Commodity prices jumped and the yen weakened in the wake of the Federal Reserve's cut in rates to the lowest since June 2004, to soften the blow of a potentially deep recession.

China, Hong Kong, Norway and Taiwan all delivered cuts of their own, and pressure mounted on the Bank of Japan to reduce rates after it meets on Friday.

The avalanche of government measures taken to increase bank liquidity, including $120 billion of currency swap lines opened between the Fed and four developing economies, and global rate cuts have prompted investors to make room in their cash-heavy portfolios for riskier assets. Credit availability and risk taking are essential to the functioning of the financial system.

"Ongoing policy initiatives from global central bankers and policymakers are finally gaining some traction," said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong.

"Despite the welcome responses to policy actions, risk from slower global growth has not been extinguished and still points to potential underperformance for much of Asia," he said in a note.

Asia-Pacific stocks traded outside Japan climbed for a third day, up 10.2 percent, according to an MSCI index. The last time the index rose for three straight days was in mid June, reflecting the relentless selling that has battered shares. The index is still down 54 percent so far this year.

Investors have snapped up global equities this week on the first sign of improving sentiment, with valuations in some markets at extreme levels. For example, the ratio of prices to book value on Japan's Nikkei share average dropped on Monday to 0.87, the lowest in more than a decade.

The Nikkei rose 8.4 percent, recovering from a 26-year low hit on Tuesday. The weaker yen emboldened investors to buy shares of exporters such as Honda Motor Co and Canon Inc.

South Korea's KOSPI surged 12.5 percent, leading the region higher, after the government established a $30 billion currency swap line with the U.S. central bank. The measure would likely relieve pressure on banks to refinance foreign debt.

Hong Kong's Hang Seng index gained 10 percent, with shares sensitive to fluctuations in commodity prices among the top gainers. CNOOC, China's biggest offshore oil refiner, leapt almost 19 percent.

U.S. stocks mostly fell overnight as a big rally faltered in the last minutes of trading on worries about the weakening corporate profit picture after a news report raised questions about General Electric's earnings outlook.

EMERGING OPTIMISM

The yen weakened on the combination of increasing risk appetite as well as expectations of the first rate cut by the Bank of Japan since the financial crisis broke out more than a year ago.

The euro jumped more than 2 percent to just above 131 yen. The euro hit a 6-1/2-year low below 114 yen last Friday.

The U.S. dollar was trading at 98.30 yen, staying well above a 13-year trough of 90.87 yen hit on trading platform EBS late last week.

Analysts at Morgan Stanley however said they still expected the yen to continue climbing.

"Our view is that yen strength owes more to de-risking and repatriation flows that do not seem to have run their course, yet," they said in a note.

In addition to foreign exchange swaps established between the Fed and central banks in Brazil, Mexico, Singapore and South Korea, the International Monetary Fund in a separate action set up a short-term fund for countries with good track records but in need of capital.

The two measures improved sentiment on emerging markets and helped to propel the Korean won 10 percent higher against the U.S. dollar and cut the cost of protection against a default on Asian government debt.

Emerging markets have been a source of pain for many investors, including hedge funds. Last month, the Credit Suisse/Tremont emerging markets hedge fund index showed a loss of 8.9 percent, the biggest in a decade, exceeding the 6.5 percent decline on the benchmark hedge fund index.

Raw materials prices rose in the wake of the U.S. dollar's sharp decline overnight. U.S. crude futures were up more than $2.00 above $69.73 barrel, having risen about $8 from the lowest level since May 2007 reached on Monday.