Asia stocks slip as financial worries persist

HONG KONG (Reuters) - Asian stocks fell on Friday, hurt byresource-related shares stung by oil's 10 percent decline thisweek and by weaker-than-expected results from Merrill Lynch,which deflated hopes for a recovery in the financial sector.

European stock markets were predicted to open mixed,according to financial bookmakers, with the FTSE 100 seen downas much as 0.3 percent but Germany's DAX up 0.2 percent, asinvestors weighed falling oil against a mixed bag of earningsresults.

Asian shares extended losses after the Wall Street Journalreported U.S. mortgage giant Freddie Mac was consideringraising capital by selling as much as $10 billion (5 billionpounds) new shares to investors, many of whom are expected tobe existing shareholders.

Persistent worries about the stability of the financialsector continued to weigh on the U.S. dollar, which shed earlygains, especially after Merrill Lynch posted a loss that wasmore than twice as large as expected.

Japan's Nikkei share average finished 0.65 percent lower,ending its sixth consecutive losing week as concerns grew aheadof quarterly earnings from Citigroup, the largest U.S. bank,due later on Friday.

The last time the Nikkei fell six weeks in a row was at thebeginning of 2008, when fears about a U.S. recession reached afever pitch.

Crude has fallen sharply this week to around $130 a barrelon fears about sluggish U.S. demand and slowly unwindingpolitical tensions between the West and Iran, the fourthlargest oil exporter. It was up nearly a dollar on Friday at$130.25.

However, investors are also sensitive to headlines aboutthe financial sector after a tepid reception for the U.S.government's bail out plan for the top mortgage financecompanies, Fannie Mae and Freddie Mac.

"Longer-term, people are concerned by the fact that eventhough U.S. authorities have talked a lot about support forFreddie Mac and Fannie Mae, there doesn't seem to be as muchpositive impact as the market would like," said Seiichi Miura,a strategist at Mitsubishi UFJ Securities in Tokyo.

Shares in the Asia-Pacific region outside of Japan fell 1.1percent, according to an MSCI index, and were within strikingdistance of a 16-month low hit on Wednesday.

Hong Kong's Hang Seng index was down 0.1 percent, weighedthe most by a 4.1 percent fall in shares of CNOOC, China'sthird-largest oil producer.

Asia's biggest oil refiner Sinopec said late on Thursdayits first-half net profit was likely cut in half compared witha year ago, having been squeezed between soaring crude pricesand China's price caps on energy products.

Australia's benchmark index dropped 1.1 percent, struck bydeclines in both energy-related shares and stocks in thevolatile financial sector. The index posted its ninthconsecutive weekly loss, the longest streak in six years.

VALUATION MATTERS

Beside Merrill Lynch, Google and Microsoft also postedlower-than-expected quarterly earnings overnight.

But IBM surprised with a much higher-than-expected profit,Nokia was optimistic about its prospects, and JPMorgan'sresults were helped by underwriting and bond trading, leavinginvestors with a muddled view on how the global situation ofhigh inflation and slow growth is affecting company profits.

Valuation is playing a major role in where big investorsare placing their money, according to State Street GlobalMarkets, which tracks 15 percent of the world's tradeableassets.

The firm measures valuation by looking at the proportion ofmarket value not accounted for by book value.

On this basis, developed market valuations are the cheapestin 20 years, while emerging market assets valuations haveremained relatively high because of the absence of creditstress in developing countries.

"Developed equity markets are being seen as a safe haven.Though inflation is high relative to recent history ... it hasyet to steamroller out of control," State Street analysts saidin a report.

The search for relative safety pushed up U.S. Treasury bondprices in Asia, bouncing back after two straight days of lossesafter disappointing earnings reports released after the closingbell on Wall Street.

The benchmark 10-year Treasury note rose 5/32 in price toyield 3.97 percent, down two basis points from late U.S. tradethe previous day.

The euro was largely unchanged against the dollar at$1.5857, about two cents below an all-time high touched onTuesday. Against the yen, the dollar slipped 0.2 percent to106.05 yen.

(Additional reporting by Elaine Lies in Tokyo)

(Editing by Kim Coghill)