Asia shares fell on Wednesday as surprise declines in U.S. consumer confidence and German business sentiment fueled fears about the strength of the global economic recovery and boosted the safe-haven yen.
U.S. stocks suffered their biggest one-day drop in nearly three weeks after data showed U.S. consumer confidence in February slumped to a 10-month low, while German business confidence dropped for the first time in almost a year.
But European shares were likely to edge higher after sharp falls in the previous session, with financial spreadbetters expecting Germany's DAX to rise 22 to 24 points and France's CAC to open 6 to 16 points higher. Britain's FTSE was seen slightly lower to flat.
Traders were also eagerly awaiting testimony by Federal Reserve chief Ben Bernanke to Congress later on Wednesday for fresh policy signals, following a surprise rise in its discount rate last week that spooked investors.
Stock markets have been volatile so far in 2010, with Asia retreating about 5 percent, amid worries that the global economic recovery is not strong enough yet for central banks to start withdrawing emergency stimulus measures put in place during the financial crisis.
The market is now in a place where investors are closely watching economic indicators for clues on the future direction, with earnings reports having run their course. It tends to react nervously to each set of data, said Yumi Nishimura, deputy general manager at Daiwa Securities Capital Markets.
Japan's Nikkei fell 1.5 percent on Wednesday, while the MSCI index of Asian shares excluding Japan shed 1.1 percent. South Korean stocks fell 1 percent, with shares in Hyundai Motor Co sliding 2.6 percent after reports that it will recall about 46,000 units of its Sonata sedan in the domestic market and another 1,300 in the United States.
Adding to investor skittishness in Asia, China implemented fresh measures to clamp down on excessive lending which it fears could create destabilizing asset bubbles.
China's banking regulator has told some lenders to restrict new loans to local governments' financing arms to ward off potential risks of default, state media reported, the latest step by Beijing to rein in galloping credit expansion.
Shanghai stocks fell in early trade but clawed back up 1.4 percent by mid-afternoon as traders looked for bargains among beaten-down small cap stocks, while Hong Kong's Hang Seng index succumbed to the downdraft from Wall Street and fell 0.5 percent.
Though Asia's recovery has been strong in recent months, led by China, economic data in the United States and Europe have painted a more mixed picture, with many economists predicting a slow and painful recovery in the West.
U.S. proposals for more stringent regulations on markets and banks have also unnerved investors. U.S. securities regulators are considering new short-sale restrictions with no exemptions for market makers, people familiar with the regulators' plans said on Tuesday.
If you have a blanket restriction on short selling... it would have the effect of discouraging market making, so you would end up with a lower level of liquidity than would otherwise be the case, which in turn can result in a more volatile market, said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney
YEN HOLDS GAINS
The yen, widely seen as a haven in times of market turmoil, held on to hefty gains made on Tuesday while the dollar stayed firm against the euro as investors sought to limit their exposure to riskier assets.
The dollar was near 90.20 yen after a nearly 1 percent drop on Tuesday. The dollar index against a basket of other major currencies was little changed.
The euro slid 0.7 percent on Tuesday, pressured by the unexpected drop in Germany's much-watched Ifo business climate index as harsh winter weather weighed on the construction and retail sectors. The data hinted Europe's largest economy could slide back into contraction in the first quarter.
And a Fitch Ratings credit downgrade of Greece's four largest banks reminded investors of the fiscal problems in Athens and the lack of clarity from the euro zone on how it might aid one of its members.
Gold edged up to $1,106 an ounce after falling 1 percent the previous day as the dollar firmed and other commodities dropped followed the worrying U.S. consumer confidence data, which triggered worries about demand.
Many economists believe there can not be a strong, sustainable global recovery until U.S. shoppers start buying again and the housing market stabilizes.
Oil prices rose 30 cents to $79.16 a barrel after data from the American Petroleum Institute showed crude inventories in the world's biggest oil consumer nation fell.
(Additional reporting by Aiko Hayashi in TOKYO; Editing by Kim Coghill)