European shares were expected to retreat on Tuesday, echoing losses in Asian stocks and commodities, after Germany cautioned against hopes for a quick fix to Europe's debt problem, and on news that China's growth slowed slightly more than expected in the third quarter.
A warning from rating agency Moody's that it may slap a negative outlook on France's credit rating in the next three months also weighed on market sentiment as investors assessed the costs if Europe's major economies have to bail out more banks or weaker euro zone members.
Financial spreadbetters expected London's FTSE <.FTSE> to open down 0.9 percent, Frankfurt's DAX <.GDAXI> to open 1.1 percent lower and Paris' CAC 40 <.FCHI> to fall 0.9 percent.
Chinese shares listed in Hong Kong <.HSCE> fell more than 4 percent after Beijing reported annual gross domestic product growth eased to 9.1 percent in July-September, slightly below forecasts of 9.2 percent, indicating the world's second-largest economy expanded at its slowest pace since the second quarter of 2009.
While the numbers did not greatly increase fears of a hard landing for China, which has been one of the few bright spots in the global economy, they prompted investors to lock in profits on gains made last week, when the country's sovereign wealth fund sparked a rally by buying shares of its big four banks.
The pace of moderation has so far been measured, and today's numbers reinforce our view that a soft landing is in sight, said Connie Tse, Economist at Forecast in Singapore.
China's data nevertheless highlighted the risks that the world's second-biggest economy faces if its top trading partner, Europe, does not resolve its festering debt problems.
Such fears prompted investors to shed shares in resource-rich Australia <.AXJO>, dragging them lower by as much as 2 percent after the GDP data, with major miners who supply China sliding between 3 percent and 9 percent.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 2.7 percent, with the materials sector <.MIAPJMT00PUS> in the MSCI index slumping more than 3 percent.
The Nikkei stock average <.N225> fell 1.6 percent, after rising to a six-week high the previous day. <.T>
As risk aversion returned, investors rushed to seek protection in the options market against losses, with the CBOE Volatility index VIX <.VIX> -- a 30-day risk forecast of volatility in the S&P 500 -- rising 18.2 percent to 33.39 on Monday, its highest one-day jump since August. <.N>
In Asian credit markets, spreads on the iTraxx Asia ex-Japan investment grade index, another gauge for whether investor risk appetite is returning, widened by about 13 basis points on Tuesday, after tightening by about 26 points over the past week on hopes of progress in Europe.
German Finance Minister Wolfgang Schaeuble said on Monday that even though European governments would adopt a five-point platform to address the crisis, a definitive solution would not be reached at the October 23 European Union summit.
This came on the heels of a Group of 20 meeting of finance ministers in Paris the past weekend, which had raised expectations that European banks would be recapitalized, and the region's bailout fund expanded to deal with a potential debt default by Greece.
Don't expect a long running leg of good news. There isn't a trend right now, Colin Bradbury, Daiwa Capital Markets' regional chief strategist for Asia ex-Japan, said of the headlines news about the European debt issues.
Given that this is the fourth quarter, and there is very strong potential for a rebound in some stocks, investors may be tempted to lock in short-term profits to add whatever return they can get, he said.
Concerns about the euro zone sovereign debt problems hurting sentiment, a slowdown in the Asian regional growth and an expected downgrade to earnings forecasts over the next 3-6 months will likely continue to pressure the markets, he said.
Asian shares are extremely cheap, which could spur buying and limit the downside from here, but it is too soon to be jumping back into high beta cyclicals, he said.
Technicals were also turning bearish, suggesting risk aversion remains.
The euro failed to breach a September high against the dollar around $1.39 on Monday, while the Australian dollar has faced resistance at its 200-day moving average of $1.03792.
The S&P 500 also turned around from its August 31 high around 1,230.
The euro regained a bit of ground after having slid on Monday, but remained below the previous day's one-month high against the dollar of $1.39148.
I think we will start to see it fade, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo, referring to the euro's recent upward momentum. The euro's outlook from here looks weak, he added.
Risk aversion hit emerging Asian currencies on Tuesday, with Korean won leading falls, as short-term investors unloaded risky positions, indicating their vulnerability to the European debt crisis.
Some of these currencies briefly gave up support around technical levels, with a few citing real money names behind the falls, although the Singapore dollar rose on demand from speculators.
HURTS COPPER, OIL
Copper fell, with three-month copper on the London Metal Exchange down 1.8 percent, and the most-active copper contract on the Shanghai Futures Exchange losing 2.6 percent.
I doubt that the price downturn today was due to pessimism over China's GDP. I will put it more to the German minister's comments last night. Copper is highly sensitive to negative news on the global economy and today's fall reflects this, said CIFCO Futures analyst Zhou Jie.
Growth worries also weighed on oil, another key industrial commodity. Brent crude hovered near $110, slipping from a high of $110.48 a barrel, while U.S. crude futures fell 0.1 percent at $86.27.
A rebound in U.S. oil that started from the October 4 low of $74.95 per barrel may have peaked at the previous session's high of $88.18, and a short-term downtrend may develop, said Wang Tao, a Reuters market analyst for commodities and energy technicals.
Retreating appetite for risk benefited government bonds, with 10-year U.S. Treasuries gaining 23/32 in price to yield 2.17 percent on Monday.
An auction of five-year Japanese government bonds on Tuesday attracted bids 2.72 times the amount accepted, indicating solid demand.
But other assets perceived as safe-haven such as gold were lackluster, with spot gold nearly flat and the dollar index <.DXY> down 0.2 percent.
(Additional reporting by Masayuki Kitano in Singapore and Carrie Ho in Shanghai; Editing by Kim Coghill)