By Kevin Plumberg
HONG KONG (Reuters) - Asian stocks fell on Wednesday, withJapan recording its worst losing streak in 43 years, asclimbing oil and food prices exacerbated stagflation fears,increasing the risk investors will capitulate and knock themarket even lower.
European stocks were flat to modestly higher, but high oilprices, and a grim warning from British retailer Marks &Spencer on the consumer outlook may cap gains.
The need for stability became paramount as the outlook forcorporate earnings, business investment and consumer spendingall deteriorated in the face of upward price pressures,supporting government bonds and gold.
Cathay Pacific and M&S, two firms that warned about theirbottom lines, were the latest to take a hit as a result ofslower growth and high energy costs.
"Inflation is rising globally, and that is probably abigger scare than the second round of capital writedowns thatwe're seeing in U.S. financials," said Mixo Das, strategistwith Lehman Brothers in Hong Kong.
"There's no indication inflation is peaking," said Das, whorecommended staying invested in sectors that are relativelyinsulated from external price pressures such as utilities andtelecommunications companies.
Japanese stocks, which earlier this year were hailed as thesmart buy amid rising global inflation, tumbled on fears thathigh energy prices will curtail demand for exports from theworld's second-largest economy. The Nikkei share average endeddown by 1.3 percent at an 11-week low, having fallen for 10days in a row -- the longest daily losing streak since 1965.
Hong Kong's Hang Seng index fell 1.5 percent, weighed themost by losses at HSBC Holdings and China Mobile Cathay Pacificwas the second-largest decliner in Hong Kong after the companywarned of "disappointing" first-half earnings because ofexpensive jet fuel.
Outside of Japan, shares in the Asia-Pacific region weredown 0.1 percent, according to an MSCI index and were withinstriking distance of lows not seen since mid March.
Another wave of selling could ensue on a convincing movebelow those lows and a substantial rise in market volatility,as investors dump losing positions even if it means taking abig hit.
"There's quite an ominous technical pattern that we'relooking at in Asia," said Lawrence Balanco, technical analystat CLSA in Hong Kong. "It has been an orderly decline so far,but the capitulation risk is out there."
Australian shares fell 0.9 percent on Wednesday, inchingcloser to a 2008 closing low.
STAGFLATION FIXATION
Korean stocks were some of the biggest decliners in theregion, with the KOSPI index down 2.7 percent. Shares ofconsumer technology firm LG Electronics dropped 4.2 percentafter dealers said JPMorgan slashed its price target on thestock, citing lackluster wireless handset sales.
The market's focus remained on how stagflation -- the toxicmix of rising inflation and slowing growth -- would hurtconsumer demand and corporate earnings. Modest gains on WallStreet overnight were largely ignored.
For many investors around the world, the most importantevent this week is the June U.S. employment report due onThursday. A larger-than-expected contraction in the U.S. labourmarket would almost certainly spark fears about less demand forthe exports from Asia.
U.S. Treasuries and Japanese government bonds rose asinvestors fled to relative safety from equity markets.
The benchmark 10-year Treasury note yield which moves inthe opposite direction of the price, ticked down to 3.99percent compared with 4 percent late in New York.
The 10-year Japanese government bond yield slipped 1.5basis points to 1.655 percent.
The euro extended earlier gains versus the dollar to hit a2-month high, up 0.25 percent at $1.5825 having hit a 2-monthpeak of $1.5847
High food and energy prices, the often-cited culprits ofthe surge in global inflation, showed no sign of letting up.
U.S. soybean prices, a critical import for China, rose to arecord high for a third day on concerns about dwindling supply.Meanwhile, corn futures bounced from a two-week low hit onTuesday, putting upward pressure on prices of everything fromethanol to soft drinks.
U.S. crude prices climbed $1.18 to $142.15 a barrel closeto the record $143.67 a barrel hit on Monday, as tensions grewbetween Israel and the world's fourth largest oil exporterIran.
Gold, often used by investors as a hedge against risinginflation, rose to the highest since mid April, at$940.30/941.30 an ounce.
(Editing by Louise Heavens)
