REFILE (June 26)-Nikkei drops as China worries linger; retail investors sell small caps

Thu Jun 27, 2013 9:50pm EDT

* Nikkei off 1.0 pct, Topix down 0.9 pct
    * Mothers index nosedives on retail investors' selling
    * China cash crunch worries still weigh - analysts
    * Market to resume upward trend after July poll - Goldman
Sachs

    By Ayai Tomisawa
    TOKYO, June 26 (Reuters) - Japan's Nikkei share average
dropped below the 13,000-mark on Wednesday in volatile trade as
worries about a cash crunch in China remained, while the mood
was soured by retail investors' heavy selling in small cap
stocks.
    The benchmark Nikkei ended 1.0 percent lower at
12,834.01. Early in the session, it was up as much as 1.7
percent on robust U.S. data and assurances from China's central
bank that it will offer funds to banks if needed.
    The market turned down as investors responded to falling Dow
Jones Industrial Average futures , which indicated U.S.
stocks likely will fall when trading opens on Wednesday.
    "Investors who are trading in Asian trading hours are
monitoring China, while they shift their attention to U.S.
futures in the afternoon," said Nobuhiko Kuramochi, a strategist
at Mizuho Securities.
    Also hurting sentiment was selling in small-to-mid size
stocks by retail investors, triggering a sharp sell-off in the
Mothers market, which nosedived 12 percent.
    "Small caps are mainly owned by retail investors, but hedge
funds also own them as they chase short-term momentum. When
retail investors sell them heavily, hedge funds bear a liquidity
risk and have to cut losses," said Yasuo Sakuma, portfolio
manager at Bayview Asset Management.
    Biochemical companies PeptiDream Inc sank 28
percent, Takara Bio Inc nosedived 15 percent and Soiken
Holdings Inc tumbled 13 percent.
    The broader Topix shed 0.9 percent to 1,069.28.
    Market players said that foreign investors and retail
investors remained worried that China was sliding towards a
liquidity crisis. They added that concerns about the U.S.
Federal Reserve's plan to scale back its stimulus also kept them
from investing in risky assets.
    "Worries over China's banking system and economy still weigh
on the markets," said Hiroaki Hiwada, a senior strategist at
Toyo Securities.
    China's central bank said late Tuesday that it had given
cash to some institutions facing temporary shortages and would
continue to do so if needed. 
    In spite of the comments, the Nikkei China 50 index 
fell 0.6 percent, while companies with high exposure to China
weakened, with Hitachi Construction Machinery Co 
falling 2.1 percent and Fanuc Corp dropping 1.6
percent.
    The benchmark Nikkei has dropped more than 19 percent since
reaching a 5-1/2-year high on May 23, hurt by slowing growth in
China, fears of a pullback in U.S. stimulus and disappointment
over the Japanese government's recently unveiled growth
strategy.
    
    GOLDMAN UPBEAT ON LONG-TERM PROSPECTS
    Goldman Sachs, however, remained upbeat on the market,
reiterating its 12-month Nikkei target of 17,000, 32 percent
above Wednesday's close.
    "The Japanese market's current consolidation phase may
persist until the July 21 Upper House elections," the brokerage
wrote in a note.
    "But beyond the elections, the market is likely to resume an
upward trend, driven by reform progress, additional policy
stimulus measures, positive earnings surprises, and confirmation
of a domestic macro recovery," it said.
    The Nikkei index is still up 23 percent this year, helped by
Prime Minister Shinzo Abe's sweeping fiscal and monetary
expansionary policies aimed at pulling the world's third-biggest
economy out of a two-decade long slump.