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Hong Kong stocks came down dragging the benchmark index to its steepest drop ever in a period of three months, following China’s announcement to the effect that banks should increase reserves, which if ever, would be the fifth time in 2008.

One of the biggest loser recently was Industrial & Commercial Bank of China Ltd., which is China’a largest bank in terms of its market value. The bank’s losses was the most experienced by it in more than four months. Hang Lung Properties Ltd. also fell and led other developers down the losers’ path. Cathay Pacific Airways Ltd., the largest Hong Kong airline, fell heavily in a span of time that exceeds two months after the cutting of its rating to sell by UBS AG.

The Hang Seng Index declined 3.6 percent or 870.25 to 23,531.93, which was the company’s hardest fall counting from March 17. The Hang Seng China Enterprises Index, which tracks mainland Chinese companies’ H shares, plunged 5 percent to 12,835.70, the firm’s biggest loss since April 14.

“Things seem to be worse than expected and general market sentiment is being hit. We tend to favor energy stocks, but avoid oil users given rising oil prices,” according to portfolio manager Nancy Lee, Taifook Asset Management Ltd., Hong Kong.

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Australian banks declined as they led the S&P/ASX 200 benchmark to its steepest fall in a span of three months. This came after Lehman Brothers Holdings Inc. posted a total loss of $2.8 billion while the Federal Reserve of the United States indicated that they may hike interest rates.

The S&P/ASX 200 Index came down by 154.60 points to 5,437.50 or a 2.8 percent change, and the All Ordinaries Index fell down by 2.6 percent or by 146.90 points to 5,544.30.

The largest Australian securities company Macquarie Group Ltd. lost A$4.19 to A$51.80, a change of 7.5 percent, which was the worst decline counting from March 13. Another company that lost a sizeable amount of money was Babcock & Brown Ltd., which is Australia’s second largest investment company. The firm tumbled down 74 cents, or 6.6 percent, and is now down to A$10.42, the company’s lowest price counting from May 2005.

National Australia Bank Ltd., also came down A$1.57 (5.3 percent) to A$27.95. Commonwealth Bank of Australia was not spared as it hit bottom at A$1.53(3.5 percent) to A$41.87, the lowest decline since March 17.

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European government notes are on their steepest drop in a week. The notes have been on the decline for nearly two months now, and came after the declaration made by European Central Bank President Jean-Claude Trichet to the effect that there may be a hike in interest rates next month to combat inflation.

The notes’ decline has moved two-year rate-sensitive yields beyond that of 10-year German bund yields. This was a first in a span of one year that has in a way inverted what is called yield curve, after a statement by Trichet on the “heightened alertness” state of policy makers on inflation. The European Central Bank’s main refinancing rate has held within 4 percent in June 5, which was exactly what was predicted by analysts.

Climbing 33 basis points, the two-year note escalated to 4.65 percent, the most its ever done counting from April 18. Meanwhile, the note due March 2010 has declined 3 percent in value to 0.50, or 5 euros to every 1,000-euro, which is approximately $1,560 at face value to 97.28.

For quite some time, we can expect the inverted yield curve to remain. As the European Central Bank moves toward another round of tightening cycle the market braces for a couple of hikes in 2008.

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Early next week, the Lehman Brothers Holdings Inc. may raise up to $5 billion in capital. The company, which is the fourth-largest securities firm in the United States, from the time it went public in 1994, may yet report its first ever quarterly loss, according to a company insider.

There is an overseas investor and one US pension fund, at the very least, that Lehman executives are talking with as regards the terms of a transaction. However, a rights offering, wherein existing stockholders can have the right to buy discounted shares, is not part of the present plan.

This year, Lehman plunged by 48 percent in New York Stock Exchange as the company deals with problems regarding the decline of the mortgage as well as structured credit business.

Amid low real estate-backed debt securities and high-yield loans demands. The securities firm is doing its utmost to minimize leverage, or the assets versus shareholder equity ratio

In April, Lehman was able to come up with $4 billion from a sale of convertible preferred shares. This was done to weed out speculation that the company was dire need of capital. By issuing subordinated bonds and some other kinds of securities, the securities company, all in all, was able to raise $8 billion.

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Banks nowadays are facing hard times, as they find it more and more difficult to raise cash to use on their investments. This situation has already been foreseen by interest-rate derivatives traders. However, the worse is yet to come and these same traders are increasing their bets that cash will become increasingly difficult to come by.

Let’s take a look at the spread (or difference) between the three-month dollar London interbank offered rate (Libor) and the three-month forward-traded overnight index swap rate. What we see here is a higher than similar spreads that are to expire this month, as revealed by Credit Suisse Holdings Inc.

What the forward movement of Libor tells you is the market is apprehensive about the current conditions, and that things might first get increasingly worse before things can start to get better. There will always be funding pressure that sticks out like a sore thumb, unless and until banks begin to clean up their balance sheets and obtained additional financing, which is about the hardest dilemma banks are facing today.

Derivatives trades reveal that amid the seemingly easing global markets condition, the worst is yet to come as far as banks are concerned after incurring severe losses and writedowns reaching up to $387 billion from mortgage-related securities counting from the beginning of 2007.

Lehman Brothers Holdings Inc. has, during the past couple of days, incurred losses by as much as 8 percent on concern that it will take outside financing to shore up the company’s balance sheet.

Actively traded Asian stocks in the United States surged after showing a remarkable week-long performance. Toyota Motor Corp. has escalated production of vehicles while JPMorgan Chase & Co. forecasted an increase in Infosys Technologies Ltd.’s prices of shares.

A 1.2 percent to a 163.98 one-week high rise has been attained by the Bank of New York Co.’s Asia ADR Index.

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For the Nikkei 225 Stock Average futures, which expires June, we have these data:

• Chicago 14,370;
• Singapore 14,375; and
• Osaka, Japan 14,370.

Toyota posted the largest gain in a span of two weeks that added 2.9 percent to $102.05. this in turn was the most influential regarding the index’s advance.

As surging fuel costs triggered exports of gas-efficient cars to North America, Toyota has been leading gains in domestic vehicle production the previous month, as reported by Japan Automobile Manufacturers Association.

Infosys, second-biggest software-services provider in India, made a huge leap by 8.3 percent to $49.11, the most it’s ever done from April 15. JPMorgan analysts reveal that the company’s revenue outlook has tremendously improved, prompting them to hike by 27 percent their year-end target price.

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Rumors of higher interest rates to boost lending income of Japanese banks cause Japanese stocks to soar, extending advantage gained in May.

The biggest gainer this time is Mitsubishi UFJ Financial Group Inc., which is the largest publicly traded financial institution in Japan.

Sony Corp., emerged stronger following a more than expected US economic growth, while Tokyo Electric Power Co., the largest Japanese utility, increased following the decline of crude oil recently. Aderans Holdings Co. and several other entities under Steel Partners gained momentum following a motion at a shareholder’s instance to get rid of management.

The Nikkei 225 Stock Average reached a high of 214.07, or 1.5 percent. This closed at 14,338.54 in Tokyo trading. Counting from January 10, this was the highest ever as it capped a gain of 2.3 percent this week. We see a 27.51 or 2 percent increase in the Topix index to 1,408.14.

“Investors appear to be shifting their funds from bonds to stocks as an inflation hedgeWith short-term rates likely remaining low, higher longer-term rates will help boost profitability at financial companies,” said fund management head Hisakazu Amano, T&D Asset Management Co., Tokyo.

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Gold has shown signs of recovery this week as it trades higher following a rebound in crude oil and a decline in the US currency versus the euro. Gold is once again in demand as hedge against inflation. Meanwhile Silver surged to just over 2 percent.

Oil has just recently reached 1.3 percent as the euro recovers from a three-day low. This week, gold plunged 3.7 percent, counting from the middle of March, this is gold’s hardest fall, after the US dollar’s huge losses versus major currencies, and oil fell from a record. Gold’s highest attained level was in March at $1,033.90 per ounce.

Regarding delivery intended for August, gold futures surged $9.80, or 1.1 percent, to $891.50 per ounce. In May, gold increased 3.1 percent. This year, it has reached 6.4 percent.

“Any sell-off in the energies and rally in the dollar have been leaning hard on the metals. The sell-off was overdone. The ratio between gold and crude is out of whack. If there is a sell-off across the board in commodities, the metals will be down the least. Gold and silver will hold because they haven’t rallied as much,” said Eagle Futures Inc. trader Nick Ruggiero, in New York.

A government statement regarding the US economy’s growth, during the first quarter, exceeding forecasts sent treasuries down. This in turn, increased the note’s yield to the highest level since December.

US debt declined before the Treasury’s auction of five-year notes that amounted to $19 billion. This occurred after the two-year securities, which attracted tepid demand, were sold for $30 billion. In another report Dallas Fed President Richard Fisher said that the central bank will likely hike interest rates should inflation rise exceedingly.

The yield on note increased by 7 basis points, or 0.07 percentage point, to 4.07 percent. It, however, reached 4.08 percent, which was the highest ever counting from December 28. There was a drop in the 3.875 percent security’s value, which will mature May 2018. The said drop was at 18/32, or $5.63 for every $1,000 face value, to 98 14/32.

“A couple of months ago, numbers like today would have sparked a bit of a rally, but sentiment is different than it was in March and early April,” according to fixed-income strategist James DeMasi, Stifel Nicolaus & Co., a brokerage in Baltimore.

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As regards the ever increasing inflation rate, Federal Reserve Bank of Dallas President Richard Fisher expressed the opinion that the central bank should hike interest rates should commodity prices rise uncontrollably and badly affect consumer spending.

Thomas Hoenig of Kansas City and Gary Stern of Minneapolis are among the Federal bank presidents that have spoken up regarding their concern about price increases this month.

Of all the members of the Federal Open Market Committee, Fisher was the only one who expressed a contrary view and dissented thrice from decisions to cut the overnight bank-lending rate as he would rather have either the status quo (no change) or a much less drastic rate reduction.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic [economy]. I don’t know a single person on the committee that isn’t concerned about inflation. The question is, ‘what is the right treatment?’ That is subject to debate,” according to Fisher.