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Nikkei Dives 2%, Italy Uncertainty Rattles Asia

Asian stock markets tumbled on Tuesday, with Japan leading losses after a general election in Italy pointed to deadlock in parliament and raised fears of a new crisis in the euro zone.

"It's rather disappointing that we haven't had a positive outcome, it looks like we're going to end up with a hung parliament situation," Paul Bloxham, chief economist for Australia at HSBC told CNBC. "When you're sitting over here in Asia or in Australia, then the disappointment is that there isn't a clear path as to how this thing's going to resolve itself."

The uncertainty in Italy has infused a degree of volatility back into markets after weeks of trading in a risk-on environment, which has helped stocks in Japan and Australia add 5 percent and 4 percent respectively since the start of the month.

Federal Reserve Chairman Ben Bernanke appears before the Senate Banking Committee later in the day and any comments he makes about an early end to the central bank's ultra-easy monetary policy may weigh on sentiment further.

"Traders will be looking for clues which support the QE3 (quantitative easing) program after last week's Fed policy meeting appeared to hint it may end sooner than expected," said Jason Hughes, head of premium client management at IG Markets.

Symbol
Name
Price
 
Change
%Change
NIKKEI
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HSI
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ASX 200
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SHANGHAI
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KOSPI
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CNBC 100
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Japanese shares fell over 2 percent, retreating further from Monday's 53-month high as traders sought refuge in the safe-haven yen, causing the currency to strengthen against major counterparts.

(Read More: Will the Yen Find a Floor at 95?)

The euro tumbled sharply against the yen, causing shares of exporters with exposure to the European economy to dive. Sony, Honda and Nikon dropped over 3 percent each.

The euro was last trading around the 120-level against the yen after slipping 2.6 percent on Monday, its biggest daily loss since May 6, 2010.

The nomination of Japan's next central bank governor was also in focus with the Nikkei daily reporting on Tuesday that Asian Development Bank President Haruhiko Kuroda is likely to be confirmed by the main opposition Democratic Party of Japan.

Investors have cheered the choice of Kuroda as central bank chief given his long-standing support for aggressive easing measures. Talk of Kuroda's nomination fueled a 2 percent rally on Monday.

(Read More: Bank of Japan Headed for Split Leadership)

Australia Claws Back

In Australia, the benchmark S&P ASX 200 closed down 1 percent but managed to claw back from earlier losses, ending comfortably above the 5,000-level.

On the earnings front, Virgin Australia reported a 56 percent slide in first-half profit, knocking its shares down almost 6 percent.

One analyst told CNBC he held doubts over Australia's reporting season, which has generally been stronger-than-expected and helped push the benchmark index to its highest level in four-and-a-half years last week.

"If we want to see more returns in the future, we need to see the profit growth back up the share market growth. We haven't seen a lot in this reporting season to convince me that we're seeing strong signs of profit growth in the Australian economy," said Steve Johnson, chief investment officer at research publication Intelligent Investor.

Hong Kong shares tested a new 2013 low in the afternoon session, weighed down by a 1 percent slump in HSBC. The Hang Seng Index has now fallen almost 4 ercent since the beginning of the month.

Shares of power supplier CLP rose 0.6 percent despite posting a 10 percent drop in its 2011 net profit, warning of further headwinds in Australia and India.

Meanwhile, the Shanghai Composite reversed earlier gains to close down over 1 percent, it's lowest level in a month, as fears of excess liquidity hurt sentiment.

China's central bank announced it would drain roughly 5 billion yuan through repurchase agreements on Tuesday, increasing worries that Beijing may be ready to tighten monetary policy. These fears caused markets to slide nearly 4 percent last week.

Shares in Seoul fell 0.5 percent, but managed to stay afloat around the psychologically key 2,000-level.

A sharp fall in insurance stocks weighed on the benchmark KOSPI. Hanwha Life Insurance dived nearly 10 percent after affiliate Hanwha Chemical said it would sell part of its stake in the insurer for 116 billion won ($107 million).

Worries about the impact of the yen's recent volatility continued to plague South Korean exporters. Automakers have been particularly hard hit by a declining yen, which makes Japanese rivals more competitive. Still, strengthening in the yen on Tuesday narrowed losses for Kia Motors and Hyundai Motor, down 0.5 and 0.7 percent respectively.