Asia stocks drop as banking sector concerns smoulder, yen stands tall

By Shinichi Saoshiro

TOKYO (Reuters) - Asian stocks dipped early on Wednesday amid growing concerns about the health of the global banking sector, particularly in Europe, while the safe-haven yen stood near a 15-month high versus the dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.7 percent.

Australian stocks dropped 2.3 percent, stooping to a 2-1/2-year trough. Japan's Nikkei, which sank more than 5 percent Tuesday, extended losses to hit a 16-month low. It was last down 2.1 percent.

Equity markets remained wobbly after being hit hard early in the week by worries about the health of the euro zone banking sector, with very accommodative monetary policy seen crimping bank profits and their ability to repay debt.

Trouble for equities has meant a boon for government bonds, with the Japanese government bond 10-year yield at minus-0.035 percent after dropping into the negative for the first time on Tuesday. The U.S. Treasury benchmark yield stood near a one-year trough and the 10-year German bund yield was at its lowest in 10 months.

The yen and Swiss franc, often sought in times of financial market turmoil, have also received strong boosts this week. The dollar traded at 114.74 yen after sinking to a 15-month low of 114.205 overnight. The greenback traded close to 0.9695 franc, a four-month low touched on Tuesday.

"Concerns about European banks are contributing to the risk off mood in markets. In addition, U.S. data this month has been weak and Fed officials appear to be toning down on rate hikes," said Shinichiro Kadota, chief FX strategist at Barclays in Japan.

The euro was flat at $1.1298 after scaling a four-month high of $1.1338 overnight on the dollar's broader weakness.

After a tumultuous start to the week, markets looked to Federal Reserve Chair Janet Yellen's congressional testimony later in the session for fresh cues on the policy outlook, which may provide some relief for markets.

While Yellen is expected to defend the Fed's first rate hike in a decade last year and likely insist that further increases remain on track, any signs of a departure from such a stance in the wake of global growth concerns could provide risk assets with a breather.

"The narrative that she faces is that the U.S. economy and asset markets are being sucked into the downdraft caused by oil, China, emerging markets, reserve manager and sovereign wealth fund asset selling, commodities, currency war, the strong dollar, weak European banks, weak Japanese banks, weak US banks and policy ineffectiveness...to name a few," wrote Steven Englander, global head of FX strategy at Citi.

In commodities, crude oil prices trimmed some of their sharp losses suffered overnight. U.S. crude was up 2 percent at $28.50 a barrel. Crude sank nearly 6 percent on Tuesday after weak demand forecasts from the U.S. government and a rout in equities pressured prices. [O/R]

Spot gold fetched $1,191.76 an ounce, within reach of a 7-1/2-month peak of $1,200.60 struck on Monday on the back of risk aversion in the wider markets. [GOL/]

(Reporting by Shinichi Saoshiro; Additional reporting by Hideyuki Sano in Tokyo; Editing by Eric Meijer and Sam Holmes)