Japan's Nikkei share average fell 1.4 percent on Friday as investors took profits and scrambled to cover shorts after positive US earnings failed to dispel pessimism about the creaky global economy as more disappointing data emerged. Financial shares were among the worst-hit as shares sank sharply at the afternoon open, a move traders attributed to selling of Nikkei futures, with thin trade exacerbating the drop.
The Nikkei closed 1.4 percent lower at 8,669.87 points, and slipped about 0.6 percent on the week. The broader Topix index sank 1.8 percent to 733.82, its biggest loss since it struck a 28-year low on June 4. "The smoke is settling from the earnings... the data is still bad and we haven't been left with anything to continue to sustain the rally," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo. While better-than-expected US earnings helped boost the S&P 500 to a 2-1/2 month high on Thursday, underwhelming data left investors in the Japanese market downbeat about prospects for the world's second-largest economy.
--- Topix marks biggest drop since hitting 28-year low
Jobless claims in the US surged last week while home resales slumped to an eight-month low in June and factory activity in the mid-Atlantic region contracted in July for a third straight month. "People are understandably continuing to short the market. We might have been rallying a bit for the past week but it's very fragile," said a senior trader at a foreign bank. Foreign investors were net sellers of Japanese equities for the third straight week last week, offloading 133.8 billion yen ($1.70 billion), data from Japan's Ministry of Finance showed. "One feature of the last couple of days is that financials have been selling off globally on this Libor investigation, I've got rid of all my bank exposure on the back of that," the trader said.
The banks sector lost 3.3 percent, its biggest fall since the March 11 earthquake last year, in the wake of a domestic rate-fixing probe that follows investigations into the suspected manipulation of the Libor international benchmark in other major economies.
However, falls in shares were accentuated as trading values remained low, with 915 billion yen worth of shares changing hands on the first section of the Tokyo Stock Exchange, stopping short of the 1 trillion yen level which is regarded as healthy.
Jun Yunoki, an equity analyst at Nomura, said the brokerage's data showed retail investors bought Japanese stocks on dips last week, particularly in shippers and machinery companies. The shipping subindex has lost 16.9 percent this month, while the Topix is down 4.7 percent.
"Since they have been buying a lot of shares on long margin for the past three to four months, it comes to a level that they will have to start unwinding," Yunoki said, adding that retail investors were unlikely to be buying aggressively. Defensives that have become overheated as investors cut their exposure to riskier assets also dropped.