Chinese banking shares fell for a second day on Wednesday, while the euro clawed back losses but was still seen at risk after Moody's slashed Portugal's credit rating to junk status, reigniting fears that it may need a second rescue package.
A rally in riskier assets has stalled after the past week's surge as investors take a cautious stance ahead of Friday's U.S. payrolls report and the latest inflation and GDP data from China next week.
Japan's Nikkei <.N225> and the MSCI Asia ex-Japan index were both up around 0.2 percent, but the Nikkei was struggling to breach the 10,000 level despite gains in commodity stocks that have helped drive the benchmark higher for a seventh day.
China bank shares again underperformed the region after Singapore state investor sold a combined $3.6 billion worth of shares in Bank of China <3988.HK> and China Construction Bank <0939.HK> to trim its exposure to the volatile financial sector.
Bank of China fell 3.6 percent and CCB slumped nearly 3 percent in Hong Kong, helping pull the Hang Seng Index <.HSI> down 0.3 percent and pushing the Shanghai Composite <.SSEC> 0.8 percent into the red.
Shanghai stocks had made a strong rebound over the past fortnight, with the index rising 8 percent to a six-week high. But that bounce has stalled on fresh fears about the impact of China's local government debt on the sector.
Valuations-wise, we've probably seen the bottom but it's a confidence issue right now, said Tom Kaan, a director at Louis Capital Markets in Hong Kong.
The Temasek move comes a day after ratings agency Moody's warned that its credit outlook on Chinese banks may turn negative as China's local government debt may be understated by as much 3.5 trillion yuan ($540 billion).
Investors had another reason to step back from risky assets after Moody's cut Portugal's credit rating by four notches on Monday, saying there is great risk the country will need a second round of official financing before it can return to capital markets, even as the European Union haggles over the shape of another rescue package for Greece.
Some economists think Ireland may also need more support and worry Spain and Italy may be next in line for aid.
The euro was trading at 1.2128 against the Swiss franc, well below Monday's high of 1.2349.
Against the dollar, the common currency recovered some ground after dropping about a full cent to a low of around $1.4395 after the Moody's downgrade of Portugal. It was trading around $1.4456 in late morning trade in Asia on Wednesday, slightly better than late New York levels.
The European Central Bank is widely expected to raise interest rates on Thursday, which could limit the euro's near-term losses, and is expected to show no sign of softening its hard-line stance that Greece must not be allowed to default on its debts.
GOLD BUOYED BY EUROPE CONTAGION FEARS
Spot gold hovered near a 1- week high as Moody's latest move once again raised fears about highly indebted peripheral euro zone countries.
While the market has moved on from Greece a little, there is still significant concern out there that it's not close to the end game, said Greg Gibbs, strategist at RBS in Sydney.
U.S. crude oil futures extended gains, rising 54 cents to $97.43 a barrel, edging closer to a three-week intraday high marked the previous day, as investors waited industry data that is expected to show a decline in U.S. crude oil inventories.