Asian stocks edged lower on Thursday after an early rally fizzled and investors found few incentives to make long-term bets with economic and corporate profit prospects worsening.
Major European stock markets were expected to open as much as 0.8 percent higher, according to financial bookmakers, after the pan-European FTSEurofirst 300 index fell for four consecutive sessions.
The yen fell to a three-month low against the U.S. dollar as mounting economic damage and prolonged political uncertainty in Japan ruin the yen's safe haven reputation and domestic investors continue to pour money into overseas bond markets in search of better returns.
Rising late-maturity U.S. Treasury yields, a decline in gold below $950 an ounce and more stable credit markets have been enticing some investors to look for value in higher-risk assets like equities, especially with valuations so low.
However, regional exports continue to slump amid the global slowdown and corporate earnings prospects are receding rapidly, paralyzing many investors.
There is just too much uncertainty out there, said Martin Angel, dealer at Patersons Securities in Australia. It is basically making a lot of people retreat to the sidelines.
Japan's Nikkei share average <.N225> finished nearly unchanged on the day, with the weaker yen not providing any boost to the shares of big exporters like Canon Inc <7751.T> or Sony Corp <6758.T>.
Japanese investors have been increasingly selling domestic equities and splurging on overseas bonds. In the last two weeks, they have sold a net 661 billion yen in Japanese stocks and bought 2.594 trillion yen of foreign bonds, according to data from Japan's Ministry of Finance.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> slipped 0.4 percent, not far from a three-month low on Tuesday.
The regional index has been holding up better in recent weeks than the all-country world equities index amid persistent market turmoil. On a 30-day rolling basis, it has slipped 4.6 percent compared with the world index, which has fallen 10 percent.
Earnings expectations for companies in the MSCI Asia-Pacific ex-Japan index have tumbled 9.6 percent in the last month, the biggest decline since the financial crisis began more than a year ago, according to Thomson Reuters data.
Meanwhile, falling stock prices in the same period have not kept pace with the changing outlook, causing 12-month forward price-to-earnings ratios, a commonly used tool for measuring valuation, to rise a bit.
Hong Kong's Hang Seng index <.HSI> underperformed the region, falling 0.8 percent in quiet trade ahead of an expiration of index futures on Thursday.
U.S. stocks struggled for direction overnight, ultimately falling late in the session after U.S. President Barack Obama warned of stricter regulation of Wall Street, language that is almost always interpreted in the market to mean leaner corporate profits.
U.S. banking regulators on Wednesday launched a stress test program to assess the largest banks' ability cope with the possibility of a deeper recession in which the unemployment rate climbs above 10 percent next year.
Though the scenario was dire, the action offered a modicum of comfort to investors.
However, Sebastien Barbe, a strategist with Calyon in Hong Kong, pointed out the stress tests may not end before October and economic data were only getting worse.
Whereas the doom and gloom is continuing to unfold in the U.S. and Europe, a devastating shockwave has now reached Asia's exporting and manufacturing sectors. This will likely continue to cap the markets in the short term, he said in a note.
Continued uncertainty has not stopped dealers from unloading their yen. The dollar was up 0.4 percent to 97.77 yen, after touching a 3-month high around 97.97 yen earlier.
The Australian dollar strengthened to a near two-month high against the yen, at 63.69 yen.
Gold fell around 0.6 percent to $945.60, and remained vulnerable to aggressive profit taking after soaring to an 11-month high of $1,005.40 an ounce last week.
Government bond markets were quiet, with the yield of the benchmark 10-year U.S. Treasury note slipping to 2.91 percent from 2.93 percent, where it was late in New York. The yield has risen about 70 basis points since the year began.
The March 10-year Japanese government bond future rose by 0.5 point, following solid demand after a 2-year auction as well bargain hunting after the cash yield rose above 1.3 percent.
U.S. crude oil rose 0.5 percent to $42.70 a barrel after jumping 6 percent overnight after data showed a larger-than-expected drop in gasoline stocks. Brent crude was up 0.5 percent to $44.52 a barrel.
(Additional reporting by Simone Giuliani in MELBOURNE; Editing by Kim Coghill)