Asian markets were mixed while oil rose $3 a barrel Wednesday after the Federal Reserve said it would bail out American International Group in a dramatic about-face as victims of the financial crisis kept piling up.
Investors bought back equities on news of the AIG rescue while selling the government bonds and yen they had accumulated in the wake of Lehman Brothers' bankruptcy filing.
However, the stock market rally across the region stalled with Australia, China, Hong Kong and Singapore falling into negative territory amid lingering fears about the banking sector. Indications of fear in markets were elevated and evidence showed hoarding of U.S. dollars among banks, reflecting distrust rather than confidence.
The Fed will provide AIG , once the largest insurer in the world, a bridge loan of $85 billion and take an 80 percent stake in the ailing company, defusing the immediate risk of a financial system meltdown but burdening the U.S. taxpayer more following the government takeover of Fannie Mae and Freddie Mac about a week ago.
Commodity prices rallied, lead by oil. The November U.S. light crude future was up $3.34 to $94.49 a barrel in the Asian session after hitting a seven-month low on Tuesday, supported partly by supply disruptions after Hurricane Ike crashed into the Gulf of Mexico.
Japan's Nikkei 225 Average rose over 2 percent, as investors were relieved that AIG may avoid the same fate as Lehman Brothers. Shares of Canon jumped more than 5 percent, buoyed by the dollar's sharp gain against the yen and by share buybacks. Financial shares such as top lender also Mitsubishi UFJ Financial Group rose.
Seoul shares ended 2.7 percent higher, recouping part of the previous session's 6 percent losses, but persistent U.S. financial market worries limited gains, while underperformed the main index after its $6 billion offer for SanDisk. Buying appetite also waned late in the session after U.S. investment bank Morgan Stanley officials said they were weighing whether it should stay independent or merge with a bank.
Australian shares gave up all their gains and fell 0.6 percent as caution took hold, snuffing out a relief rally sparked by the AIG bailout. Financials such as Macquarie Group and Babcock & Brown extended the previous session's losses.
Hong Kong stocks gave up early gains to close 3.6 percent, falling below the key 18,000-point level as financial and property stocks slid on uncertainty over the impact of a U.S. financial crisis in the sector.
Singapore's Straits Times Index was 1.7 percent lower. Bank shares gave back all their morning gains to trade in negative territory. DBS Group, United Overseas Bank and OCBC were all declining.
China's Shanghai Composite Index fell 2.9 percent, hitting a new 22-month low, led by bank shares, which continued to be hurt by the turmoil in the global financial industry. The SCI sank 4.47 percent Tuesday, bringing it below the 2,000-point level which many analysts and investors had seen as important support. China Merchants Bank, which tumbled its 10 percent daily limit Tuesday, was down further after saying it held $70 million of debt in bankrupt Lehman Brothers and had not yet set aside any provisions for potential losses.