The Australian dollar and emerging market currencies slid on Wednesday as investors began to question how much longer a near three-month rally in riskier assets can last without evidence of a sustained economic recovery.
Hunger for higher yields kept regional bonds in demand, however, while worries about tight summer supplies pushed crude oil prices to fresh six-month highs about $60 a barrel.
Asian stock markets were choppy but mostly edged higher, with investors reluctant to abandon cyclical shares, though they trimmed holdings in the financial and materials sectors after reports showed U.S. housing starts at a record low and the worst-ever contraction in Japan's economy in the first quarter.
Major European stock markets were expected to open as much as 0.6 percent lower, discouraged by the grim Japanese data and after Hewlett-Packard Co
A key gauge of Australian consumer sentiment in May also tumbled despite rallying equity markets, paving the way for dealers to take some profits on the Australian dollar's rise on Tuesday after it earlier hit a seven-month high.
Risk appetite has held the upper-hand of late but an emerging negative balance of recent economic data should be injecting some caution, said Patrick Bennett, Asia FX and rates strategist with Societe Generale in Hong Kong, in a note.
Japan's Nikkei share average <.N225> edged up 0.6 percent despite the bleak economic report, with shares of pharmaceutical companies and trading houses gaining.
Japan's gross domestic product contracted 4 percent on a quarterly basis as exports, domestic demand and investment buckled, roughly in line with expectations.
The outlook was uncertain, with some economists expecting stimulus spending to hasten a recovery, while others were concerned that collapsed exports would continue to inhibit already weak domestic demand.
The Japanese economy may return to growth temporarily but it could suffer a contraction again afterwards, said Hiroshi Shirashi, an economist with BNP Paribas.
The MSCI index of Asia Pacific stocks outside Japan <.MIAPJ0000PUS> was nearly unchanged, after hitting the highest since October 6 on Tuesday.
The index is still up more than 50 percent from lows in early March, but like other global benchmarks appeared to have lost steam in recent sessions on fears markets have risen too far, too quickly without concrete signs of economic recovery.
Hong Kong's Hang Seng index <.HSI> slipped 0.4 percent, with property stocks under fire, though the sub-index <.HSCE> of mainland companies listed in Hong Kong edged up 0.2 percent.
BEIJING'S DEEP WALLET
Optimistic investors hope Beijing can essentially spend its way to a recovery, which will then spill over to the rest of the region. To jump start consumer spending, the government said on Tuesday it would increase a subsidy scheme to 5 billion yuan ($733 million) from 1 billion yuan to encourage purchases of automobiles and home appliances.
It was not clear if this was new spending.
Those hopes had also inspired buying of the Australian dollar and emerging Asian currencies. However, dealers were cutting their exposure to those currencies and buying back U.S. dollars and yen on Wednesday.
The Australian dollar fell 0.4 percent on the day, at around US$0.7700 after earlier rising to a seven-month high of US$0.7784. A Westpac-Melbourne Institute survey of consumer sentiment fell 4.3 percent, after opinions soured about a national budget chock full of debt.
The Aussie dollar and currencies of other major commodity exporting countries had been buoyed of late by hopes that economic recovery was near and demand for raw materials would recover.
The U.S. dollar strengthened broadly against regional currencies, rising 0.6 percent against the South Korean won and 0.7 percent against the Phillipine peso.
But the dollar slid 0.4 percent against the yen to 95.60 yen, having carved out a range of about 94.50 to 101.00 in the last three months.
Emerging market bonds, however, fared better than their currencies, thanks to verbal commitments by some central bankers to keep their interest rates low for a while and pent-up demand among investors for higher yield.
Philippine state agency PSALM, which oversees the assets and debt of National Power Corp, sold 10-year bonds on Tuesday yielding 7.375 percent that were four times oversubscribed. The bonds were trading at a price of 101.125/101.375 versus its issue price of 99.127, a trader said.
Credit analysts at Calyon said in a note that negative data have not derailed appetite for new issuances, and with supply tight investors sick of the pittance offered in money markets may eventually go looking for yield in lower quality credit.
Retail and accounts continue to be long-cash and the street knows it, they said. At this pace, we could potentially see markets here beginning to take tentative steps lower down the credit curve.
U.S. crude for July delivery rose 0.6 percent to $60.47 a barrel as refinery problems continued to spur fears about tight supply in the summer. Brent crude was trading higher on the day as well, at $59.16 a barrel.
(Additional reporting by Jun Ebias)
(Editing by Kim Coghill)