Asian equities fell from eight-month highs on Thursday, led by commodity-related shares, after disappointing U.S. private employment and services sector data led investors to trim over extended bets.
Major European stocks were expected to rise as much as 0.4 percent, according to financial bookmakers, though convictions were low with U.S. stock futures pointing to a lower open later and the European Central Bank and the Bank of England meeting to set policy.
The U.S. dollar was largely steady against the euro after rebounding sharply overnight, benefiting as investors cut bets on higher-yielding currencies and after a Reuters story said Asian monetary officials would stick with U.S. Treasuries even if the top U.S. sovereign debt rating was downgraded.
Materials and energy stocks led the decline in Asian stocks from eight-month highs reached on Wednesday, following a 2.8 percent decline overnight in the Reuters-Jefferies CRB index <.CRB>, a global commodities benchmark.
The real test of investors' willingness to take risks for higher returns will come on Friday, when the May U.S. payrolls number is released.
A dose of much needed reality has been swallowed by markets overnight. The tone of economic data has not so much changed, but perception of what constitutes an outright positive story certainly has, said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong, in a note.
The MSCI index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 2.8 percent, the biggest single-day decline since May 14.
The index was still up 31 percent so far in 2009. Utilities were largely unchanged on the day, as investors shifted some money to defensive bets, and consumer discretionary stocks outperformed on hopes domestic growth in Asia will remain resilient.
Japan's Nikkei share average <.N225> edged down 0.75 percent, with industrial names like Fanuc <6954.T> and Shin-Etsu Chemical <4063.T> among the biggest drags on the market.
Small signs of hope in Japan's exports and production have paved the way for foreign investors to scoop up bargains, with official data showing foreign net purchases of equities for three of the last four weeks.
In Hong Kong, the Hang Seng index <.HSI> was down 2.4 percent, hurt by a mixed bag of banks, property developers and energy-related stocks, as the pause in the global equity rally encouraged shrinking both positions and exposure to risk.
In testimony to the U.S. House of Representatives, Federal Reserve Chairman Ben Bernanke gave an upbeat assessment of the economy, saying he expects activity to turn up later this year, but also warned the nation needed to plan now for what he called fiscal balance.
The yield on the 10-year U.S. Treasury note has climbed 134 basis points so far this year, partly as investors shift out of ultra-safe assets and also because of concerns the world will not want to finance the growing U.S. budget shortfall.
The 10-year future was flat while in the cash market the 10-year yield was up about 3 basis points after tumbling 8 basis points on Wednesday.
The yield on the 10-year Japanese government bond dipped to 1.53 percent after hitting a seven-month high of 1.55 percent on Wednesday, weighed by the drop in Treasury yields on Wednesday.
U.S. reports on Wednesday showed companies shed 532.000 private sector jobs in May, more than expected, while a gauge of the giant U.S. services sector reflected contraction for the eighth consecutive month.
The U.S. data reminded market participants once again that the economic outlook isn't so rosy as many have been saying lately, said Hideki Amikura, deputy general manager of foreign exchange trading at Nomura Trust and Banking.
He said the much talked-about 'green shoots' scenario may peter out after restocking in the April-June quarter, which is usually more buoyant than the first quarter as firms tend to boost inventories.
U.S. crude for July delivery was largely unchanged on the day, at $66.00 a barrel after a 3.5 percent decline overnight. Brent crude was trading at about $65.90 a barrel.
Oil prices were still up about 48 percent year-to-date, thanks to a small production-based recovery around the world.
Still, data released on Wednesday showed U.S. fuel demand for the four weeks ended May 29 was down 7.7 percent on an annual basis, suggesting the recovery may be sluggish.
The dollar has had a big influence on crude prices, with oil gaining when the currency weakens and vice versa.
After tumbling overnight, the euro recovered a bit and rose 0.3 percent from late New York to $1.4200, more than a cent below a high for the year of around $1.4337 reached early on Wednesday.
(Additional reporting by Aiko Hayashi in TOKYO)
(Editing by Kazunori Takada)