Asian shares fell for a third day in a row on Wednesday as investors grew more risk averse, with renewed uncertainty over Greece's bailout and mounting worries about slowing global economies overshadowing support from ample liquidity.
The three U.S. equity indexes recorded their biggest one-day percentage drop this year on Tuesday, while the CBOE Volatility index VIX <.VIX> rose, reflecting a receding appetite for riskier assets.
Commodity currencies eased, with the Australian dollar falling for a second session in Asia to a six-week low. Data showing its economy grew a disappointingly slow 0.4 percent last quarter also dented sentiment.
The euro benefited from players taking profits on currencies which have been rallying so far this year, notably the Aussie. The single currency, still facing huge short positions, inched up 0.2 percent to $1.3140, off Tuesday's three-week low of $1.3103. The Australian dollar trimmed early losses to hover around $1.054.
The MSCI Asia Pacific ex-Japan index <.MIAPJ0000PUS> fell 0.9 percent, led by the materials sector <.MIAPJMT00PUS> and Australian shares, which hit seven-week lows on concerns that slowing global economies would undermine demand for commodities.
The ex-Japan index had risen more than 11 percent so far this year through Tuesday's close, and traders said it had looked increasingly ripe for a pullback.
Japan's Nikkei average <.N225> was down 0.9 percent after falling more than 1 percent to a two-week low. <.T>
Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open flat to 0.2 percent lower. <.L> <.EU>
Markets are facing profit taking pressures, with prices having risen far more strongly than many anticipated this year, said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
With concerns rising over growth prospects in emerging economies, investors realise they need fresh factors than ample liquidity to elevate markets further, he said.
Copper remained sluggish, while oil recovered after falling the day before when worries about supply disruptions eased.
HEAT ON GREECE
Athens turned up the heat on its creditors on Tuesday as it sought to secure a bond swap that will cut its mountainous debt, while the main bondholders group warned a disorderly default would cause over a trillion euros of damage to the euro zone.
Some Greek pension funds and foreign investors rejected the offer, which will see investors lose almost three-quarters of the value of their holdings.
Greek private creditors have until Thursday night to say whether they will participate in the bond swap that is a crucial
part of a bailout programme to save Greece from bankruptcy and meet a debt repayment on March 20.
I think we are at a watershed now, a trader at a Japanese bank said, adding that if the Greek debt swap went well the market could return to the risk-on mood. But if Greece cannot get the deal, then that would be a game changer, he warned.
More signs emerged of the damage to growth inflicted by the euro zone debt crisis, as Brazil followed China in raising fears of a slowing economy.
Data on Tuesday showed South America's largest economy expanded just 2.7 percent in 2011 after surging 7.5 percent in 2010. Quarterly growth in Oct-Dec was a scant 0.3 percent following a revised 0.1 percent contraction in the previous quarter.
China's Minister of Commerce on Wednesday said Chinese exports increased by an estimated 7 percent in the first two months of this year from year ago levels, while import growth was likely above 7 percent in the same period.
China also said it will boost energy imports in 2012, supporting oil prices which remained underpinned by supply risks and Iran's nuclear programme. Brent crude climbed above $122 and U.S. crude topped $105 a barrel.
RISK GAUGE EYED
As a gauge of how investors perceive risk, the VIX index, which measures expected volatility in the Standard & Poor's 500 index <.SPX> over the next 30 days, jumped nearly 16 percent on Tuesday. It was the biggest one-day rise since November, as the S&P 500 marked its worst three-day period since December.
I am getting a bit nervous about risk gauges, Hattori said, adding that he also kept an eye on the Ted spread, which appears to have halted its narrowing trend, and dollar/yen one-month implied volatility, which was creeping higher.
The Ted spread, the spread between Libor and three-month Treasury bills, represents the risk premium of lending to a bank and has been falling as worries about a credit crunch in Europe abated after the European Central Bank's first liquidity injection in late December.
Asian credit markets weakened in tandem with riskier assets, pushing the spread on the iTraxx Asia ex-Japan investment-grade index 5 basis points wider.
(Additional reporting by Hideyuki Sano; Editing by Richard Pullin)