Riskier assets across the board -- stocks, metals, commodities and currencies -- fell Thursday as investors grew wary about taking risks ahead of a key European leaders' summit on Sunday.
The euro dipped as European policymakers struggled to reach consensus on the sovereign debt crisis in the region, and concerns about the global economy hit industrial metals such as copper and commodity-linked currencies such as the Australian dollar.
Risk aversion prompted investors to trim cross-yen pairs, pushing the Aussie down 0.2 percent against the yen.
Gold resumed its inverse correlation with the greenback and fell 1 percent, weighed down by a firmer dollar, as measured by an index against six major currencies.
But investors looking for alternative assets found a place in the Asian bond market, where Korean National Oil Corp's (KNOC) 5-year dollar bond drew strong interest, helping soothe sentiment and limiting the spread on a key Asia credit default swap index.
KNOC sold its bonds at a tighter spread than the initial guidance and a strong appetite in the secondary market narrowed the yield further by about 10 basis points on Thursday, with the issue trading at around 300 basis points over U.S. Treasuries.
Asia took 44 percent, U.S. 40 percent and Europe 16 percent.
The investors were eager to play with broader sentiment turning ... even though the EU isn't completely out of the woods, said a banker close to the deal.
The improved environment helped contain spreads on the iTraxx Asia ex-Japan investment grade index, a gauge for whether investor risk appetite is returning, which widened by a tad on Thursday.
But the spread of bonds issued by the European financial stability facility and German government bonds widened by around 20 basis points this week, underscoring a lack of investor confidence in the progress to contain the debt crisis.
Seeing how European policymakers are struggling to come to an agreement, investors are doubtful if they can really move forward with the rescue fund, said Akane Enatsu, credit analyst at Barclays Capital in Japan.
ASIA SHARES FALL
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 1.8 percent, with the materials sector <.MIAPJMT00PUS> leading the decline, falling nearly 3 percent.
Australian shares <.AXJO> fell 1.7 percent on Thursday as miners sank after copper and gold prices fell, while Japan's Nikkei stock average finance/markets/index?symbol=jp%21n225>.N225 fell 0.9 percent. .T
The MSCI world stocks index <.MIWD00000PUS> was down 0.3 percent at 297.88.
U.S. stocks ended lower on Wednesday as sentiment was also undermined by the Federal Reserve's Beige Book report, which suggested the outlook for the U.S. economy grew dimmer in September.
Shanghai copper fell by its limit of 6 percent on Thursday, with the most-active January copper contract on the Shanghai Futures Exchange tumbling as low as 50,950 yuan ($7,989.024) per tonne in early trading.
This is mostly a reaction to the euro zone crisis, and a major correction after the recent rebound has ended, said Zhao Kai, an analyst at Jinrui Futures.
Spot gold dropped to $1,624.39 an ounce on Thursday, on course for its fourth consecutive session of losses.
Oil trimmed earlier gains, after falling the day before on concerns about growth. Brent crude futures were flat around $108.41 a barrel, while U.S. crude futures edged down 0.3 percent higher at $85.84 a barrel.
EURO UNDER PRESSURE
The euro dipped 0.1 percent to $1.3747, having retreated from the previous day's intraday high of $1.3870, as European policymakers struggled to reach consensus on measures to contain the crisis.
French President Nicolas Sarkozy heightened concerns about upcoming progress by saying plans to tackle the euro zone debt crisis have stalled, with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund.
Investors are looking forward to more details from the Sunday meeting, including plans to contain the festering euro zone crisis, particularly beefing up the rescue fund, and recapitalize European banks.
A report in the Financial Times said on Thursday, however, said the plan to strengthen Europe's banking system is set to fall short of market expectations.
(Additional reporting by Umesh Desai in Hong Kong and Carrie Ho in Shanghai; Editing by Kavita Chandran)