HONG KONG, Oct 16 (Reuters) Asian stocks fell today, led by financial shares after a gloomy outlook from Citigroup reignited credit market worries, sending investors to the safety of government bonds.
But investors bought energy stocks including Japan's INPEX Holdings after US crude hit a record high of $86.71 a barrel overnight.
At 0736 IST, MSCI's measure of Asia Pacific stocks excluding Japan had shed 0.6 per cent, while Tokyo's Nikkei average was down 1 percent by the end of morning trade.
On Monday, the MSCI index rose nearly 1 percent to within a hair's breadth of its record high set last Thursday, boosted in part by upbeat US retail sales data.
But Citigroup cast a shadow over the U.S. outlook. The number one US bank posted a 57 percent fall in third-quarter profit and said US consumer credit conditions would probably weaken this quarter after mortgage delinquencies accelerated.
''We're seeing credit concerns resurface, but we don't believe it'll be as bad as it was in August,'' said Kim Jeong-hwang, a strategist at Woori Investment and Securities.
''Problems related to the US subprime mortgage sector will continue to be worked out, leading to more fluctuations in the market, but the worst of it does seem to be over.'' After the US market closed, Federal Reserve Chairman Ben Bernanke said US financial markets were healthier following a turbulent summer, but that a full recovery would take time.
He told the New York Economic Club that ''the Federal Reserve will continue to watch the situation closely and will act as needed to support efficient market functioning and to foster sustainable economic growth and price stability''.
BANKS HIT Still, investors dumped bank shares after Citigroup's warning, sending top Japanese lender Mitsubishi UFJ Financial Group down 4.9 percent and South Korea's Kookmin Bank down 2.3 per cent.
Australia's Macquarie Bank and National Australia Bank both fell about 1.4 percent. MSCI's index of financial stocks in the Asia Pacific region slid 1.7 per cent.
But energy stocks were cushioned by expectations that record high oil prices would help boost profits. Japanese oil explorer INPEX Holdings advanced 2.4 per cent and Australian oil and gas producer Santos added 1.1 per cent.
US crude rose nearly 3 per cent to the record high of 86.71 dollars a barrel late on Monday and was at 86.26 dollars in morning trade in Asia.
DOLLAR SOFTER The credit worries sparked by Citigroup diminished appetite for risk, helping support the low-yielding yen, which is often used to fund purchases of higher-yielding and more risky assets in the popular carry trade.
The dollar bought 117.29 yen after falling from a two-month high near 118 yen yesterday, while the euro traded at 166.54 yen, down from a near three-month high of about 167.70 yen reached yesterday.
Against the dollar, the euro fetched US dollars 1.4199, off a two-week high near $1.4245.
Safe-haven government bonds were also in favour in an environment of lower risk appetite. The yield on the 10-year Japanese government bond (JGB) slipped half a basis point to 1.725 per cent.
''JGBs are tracking movements in Treasuries and domestic share prices. But JGB yields are not expected to move sharply in either direction as their current levels are neither high enough to prompt aggressive buying nor low enough to spark heavy selling,'' said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.
Gold fell from a 28-year high after rallies over the last two weeks, but sentiment for the precious metal remained strong due in part to tensions in the Middle East. Cash gold was at 756.10 dollars an ounce, off Monday's peak of 759.90 dollars.
REUTERS SS AS0907