Asian stocks fell about 2 percent on Monday as the outbreak of swine flu in North America hurt shares of airlines while prompting some market players to trim risky positions, hitting currencies such as the Australian dollar.
European stock futures fell about 1.3 percent, pointing to a weaker open. <.EU>
Analysts said the initial market reaction was limited but were wary about the potential economic fallout from the flu outbreak, especially at a time when the global economy is starting to show signs of recovering from a deep recession.
Shares of companies such as Hong Kong's Cathay Pacific Airways <0293.HK> and Singapore Airlines
Mexico's health minister said the swine flu death toll in the country reached 103 as fears of a global pandemic grew with new infections in the United States and Canada.
Investors in Asia are all the more aware of the potential damage after the outbreak of SARS in Hong Kong six years ago hobbled the city and regional economy, as well as flare-ups of bird flu in the past few years.
Hong Kong and Singapore were among the countries stepping up use of thermal scanners at airports to prevent entry of swine flu.
This will deepen the global recession and will probably have a contagion effect on export-led economies in Asia, said Daniel Chan, senior investment strategist at DBS Bank in Hong Kong.
Japan's Nikkei average <.N225> bucked the trend to inch up 0.2 percent as drugmakers such as Chugai Pharmaceutical <4519.T> jumped on an expected pick-up in flu drug sales, while banks rose on news that Shinsei Bank <8303.T> was in merger talks with Aozora Bank <8304.T>.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> dropped 1.8 percent and was off a six-month peak struck earlier this month.
After gaining 1.7 percent on Friday, futures on the U.S. S&P 500 were down 1.7 percent in Asia trade, giving a boost to safe-haven U.S. Treasuries.
Hong Kong's Hang Seng <.HSI> shed 2.7 percent, partly due to a drop in shares of Chinese banks as major foreign shareholders are expected to sell some of their holdings as lock-up periods end this week and before they report quarterly earnings.
The world's largest lender by market value, Industrial & Commercial Bank of China <1398.HK>, lost about 4 percent as investors including Goldman Sachs
A report that German regulators had said the country's banks held about $1.1 trillion of toxic assets also dogged financial shares, some analysts said.
BONDS, AUSSIE AND COMMODITIES RETREAT
While Treasuries climbed, other government bond markets showed little reaction to the swine flu news.
Japanese government bond futures pulled back on the Nikkei's slight gains, shrugging off details about the Ministry of Finance's plan to increase base JGB issuance by $174 billion this fiscal year to pay for economic stimulus. Korean bond futures fell before bond auctions this week.
In limited Asian trade, the Mexican peso fell about 1.5 percent to 13.665 but trimmed losses. Traders said activity in the peso would pick up closer to the start of U.S. trade.
The Australian dollar -- the highest yielding of big currencies whose fortunes are tied closely to swings in stocks and commodities -- shed 1.5 percent to $0.7120 after hitting a session low of $0.7100.
The dollar index, a gauge of its performance against six major currencies, climbed 0.4 percent to 85.099 <.DXY>. But the dollar fell to a one-month low versus the yen at 96.62 yen as the Japanese currency gained broadly.
Commodities succumbed to on worries demand will take a hit due to the spreading flu virus. U.S. crude oil futures were down $1.25 to $50.30 a barrel, while U.S. soy and corn futures both tumbled between 3 percent to 5 percent.
(Additional reporting by Jun Ebias; Editing by Lincoln Feast)