Lingering concerns about the global economy and a host of negative local factors pushed Asian stocks lower on Thursday, with Toyota hitting a 10-month low on investor concerns over its massive vehicle recall.
European stocks <.FTEU3> were expected to shrug off weakness in Asian and U.S. markets, with investors keenly awaiting rate decisions from the European Central Bank and the Bank of England later in the day.
U.S. stock futures were little changed after modest losses on Wall Street overnight, where stocks slipped on a disappointing sales outlook from top global drugmaker Pfizer
Shares in Hong Kong <.HSI> fell 1.6 percent, with sentiment also affected by a tightening of monetary conditions in China as well as concern over tensions between Washington and Beijing. Shanghai shares <.SSEC> also fell in morning trade before clawing back early losses.
In the latest sign of trouble, Chinese officials reacted coolly on Thursday to a vow by President Barack Obama to get much tougher with China over the yuan's exchange rate, which Washington believes is artificially undervalued.
Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong, said both countries had too much at stake to let disputes over the yuan, trade and Taiwan derail ties.
When it comes to market reaction, I doubt it will be major as long as the tension is contained to the political arena, said Kowalczyk.
I think Beijing will resume gradual appreciation of the renminbi in the second quarter and it will probably defuse the currency tensions to some degree by doing so.
China effectively froze the yuan in July 2008 to help its exporters weather the global economic crisis. Most market analysts expect China to let the yuan start climbing gently again sometime in 2010 since year-on-year export growth has resumed.
Asia Pacific stocks outside Japan as measured by MSCI <.MIAPJ0000PUS> were down 0.8 percent, with virtually all sectors in the red as traders took profits from recent gains and awaited more concrete signs that the U.S. economic recovery is gaining traction.
Data on Wednesday showed signs of a stabilization in the U.S. job market but only scant growth in its vast services sector, while other reports this week have pointed to a slow but painful recovery for the troubled housing market.
Investors are now awaiting the key nonfarm payrolls report on Friday. A Reuters poll of top 20 forecasters estimated 8,000 jobs were added to the economy.
Japan's Nikkei average <.N225> fell 0.5 percent, hit by more selling in Toyota Motor Corp <7203.T>, which sank 3.5 percent.
Toyota's woes worsened after the Obama administration stepped up pressure on the world's largest carmaker to address a range of safety issues.
Its shares have lost more than a fifth of their value since a recent high on January 21.
After the market close Toyota lifted its cautious guidance for the financial year to this March, predicting a sharply smaller operating loss despite its escalating recall troubles. But a company official was unsure of the full impact on 2010/11 earnings.
In contrast, Honda Motor Co <7267.T> jumped 2.3 percent after the automaker, Japan's second biggest, raised its annual outlook far beyond investor expectations and said it anticipated more growth next financial year.
South Korean automakers also rallied on hopes they would pick up market share from Toyota. Hyundai Motor <005380.KS> was up 3.6 percent while Kia Motors <000270.KS> gained 2.9 percent.
Resources shares also skidded across the region on lower metals prices. Shanghai copper fell 3 percent on Thursday while London futures pared a 3.4 percent slide in the previous session as worries about the impact of tighter monetary policy, particularly in China, continued to unsettle the market.
CURRENCIES EYE EUROPEAN MEETINGS
In currency markets, the dollar <.DXY> was broadly steady after blipping higher as the New Zealand dollar tumbled on a jump in unemployment and the Australian dollar slipped on data showing a dip in monthly retail sales.
The New Zealand dollar hit a five-month low of $0.6960 after data showed the country's jobless rate rising to a 10-year high, prompting markets to scale back expectations of an interest rate rise before mid-year.
The euro dipped as low as $1.3866, edging close to a seven-month low of $1.3851 hit on trading platform EBS earlier this week. The euro later pared its losses and was steady compared to late U.S. trading on Wednesday at $1.3890.
The ECB is widely expected to keep rates unchanged at its meeting on Thursday as financial woes in Greece, Portugal and Spain endanger the currency bloc's recovery.
The Bank of England's monetary policy meeting will also be in focus on Thursday.
The BOE is expected to halt its quantitative easing program, although interest rates are likely to be held at 0.5 percent. Sterling edged up 0.1 percent to $1.5912.
Oil slipped 28 cents to $76.70 a barrel as rising crude inventories in the U.S. signaled that a rebound in U.S. economic activity was failing to translate into higher demand.
Gold prices inched lower to $1,106.80 an ounce as some investors feared a bullish U.S. job report could further boost the dollar, which would undermine bullion's appeal as a currency hedge.
(Editing by Kim Coghill)