Asian stocks pulled back from six-month highs on Wednesday but held up after the drop on Wall Street overnight, with hopes for more Chinese stimulus spending helping offset reports of weak first-quarter growth.
Investors were cashing in on gains after many equity markets have jumped between 20 percent and 30 percent since early March, with Asian markets leading the charge higher on signs that China is helping drive a regional growth pick-up, analysts said.
Futures on European shares were down between 1.1 percent and 1.3 percent in early trade.
Higher-yielding currencies such as the Australian dollar relinquished some of their hefty gains in the past month after data showing a surprisingly big drop in U.S. retail sales last month highlighted the bumpy road to recovery in the recession-hit global economy.
But gains in safe-have government bonds were limited as investors fret about the wave of coming supply to fund government spending aimed at reviving growth, as well as signs that Asian central banks may have finished with their aggressive rate cuts.
Two of the top performing markets in the world so far this year -- the Shanghai Composite index <.SSEC> and the Taiwan Weighted index <.TWII> -- held up the best with declines of less than 1 percent.
A report on the Shanghai Securities News website said that Chinese annual economic growth, due to be released on Thursday, was between 6.0 percent and 6.8 percent in the January-March quarter, what would be the lowest on quarterly records going back to 1992.
Speculation has been rife in the past few days that China might announce a new package focused on boosting consumer spending on top of the $585 billion plan targeting infrastructure spending.
We've been expecting the first quarter of 2009 to be the bottom of this cycle, and it doesn't look like we will be disappointed, said Andy Rothman, China macro strategist at brokerage CLSA in Shanghai.
Whether the full-year number is closer to 7 percent or to 8 percent is far less important than our firm conviction that the Chinese economy will be very strong in the second half of 2009, and that this strength should last well into 2010, Rothman said.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> fell 1.4 percent, led by a drop in consumer discretionary and technology shares -- some of the biggest gainers in the rally.
Volumes were lighter than the previous day when stocks jumped. The increase in volumes on days of solid gains had suggested more market players have become more confident in putting money to work in riskier assets.
On Tuesday the U.S. S&P 500 <.SPX> shed 2 percent, and S&P futures were pointing to further losses with a drop of 0.7 percent in Asia.
After the closing bell, Intel Corp
U.S. corporate earnings season has kicked into high gear this week, stirring some caution among investors.
Japan's Nikkei average <.N225> fell 1.1 percent, pulling further away from a three-month peak reached last week.
Japanese government bonds gained on the stock retreat and a solid auction of 30-year paper the previous day, while South Korean government bonds extended gains after the Korea Securities Finance Corp joined pension funds and other investors to take advantage of higher yields to buy.
Bond yields and swap rates have jumped in many countries on the worries about supply and as central banks, such as South Korea's, have chosen to keep rates on hold while eyeing signs of economic growth improving.
Benchmark 10-year JGB yields dipped 3 basis points to 1.430 percent and down from a five-month high hit last week. The benchmark five-year Korean Treasury yield slipped 2 basis points to 4.45 percent and was down 34 basis points from last week's high.
The yen climbed across the board as market players trimmed carry trades -- using the low-yielding Japanese currency as a source of funds to buy higher-yielding currencies.
A fall in volatility across asset markets has helped make carry trades more appealing after many investors got burned with the strategy late last year as stock markets plunged.
Equity strategists at HSBC said in a note to clients that what they called the volatility bubble -- highlighted by the violent plunge in stocks and other assets last year -- may be over.
The dollar was down 0.5 percent at 98.30 yen, while the Australian dollar dropped 1.3 percent to 70.50 yen after having reached a six-month high the previous day.
Oil prices edged down 10 cents to $49.32 after losing more than 1 percent on Tuesday.
(Additional reporting by Parvathy Ullatil)
(Editing by Kazunori Takada)