Asian shares and the euro fell on Monday as a surge in Spanish government bond yields renewed concerns about Europe's sovereign debt crisis and undermined investor appetite for riskier assets.
China's yuan weakened after the central bank doubled the size of the currency's trading band over the weekend, a crucial reform in the process of liberalising the country's nascent financial markets.
A firmer dollar on the back of the euro zone's woes, and worries about slowing demand from China, also weighed on a broad range of commodities from precious metals and copper to oil.
MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 0.8 percent, dragged lower by the materials sector <.MIAPJMT00PUS>, which underperformed other sub-indexes with the broad drop in commodities prices. Japan's Nikkei average <.N225> shed as much as 1.6 percent. <.T>
Europe will be the focal point for the market this week, especially the results of Spanish bond auctions that may provide clues on how deep this latest crisis is running, said Choi Chang-ho, an analyst at Shinhan Investment & Securities.
With European problems making investors nervous, the region's equities likely start trading lower, with financial spreadbetters predicting major European markets <.FTSE> <.FCHI> <.GDAXI> would open down as much as 0.7 percent. U.S. stock futures were down 0.2 percent. <.EU> <.L> <.N>
Spain's government bond yields jumped on Friday and the cost of insuring its debt against default hit an all-time peak as record borrowing by its banks from the European Central Bank highlighted fears about the country's finances.
Spain faces a test of investor confidence this week with an auction of two- and 10-year bonds on Thursday.
The euro slipped 0.4 percent to $1.3019, after hitting a one-month low of $1.3009 on Monday. The dollar index <.DXY>, measured against major currencies, rose 0.3 percent.
The dollar's strength pushed precious metals lower, with spot gold down 0.8 percent to $1,646 (1,039.8 pounds) an ounce, extending Friday's 1 percent loss, while spot platinum slid more than 2 percent to $1,559 (984.85 pounds) an ounce, its lowest since January 25.
Industrial commodities also took a beating, with Brent crude oil shedding more than a dollar to a low of $119.80 a barrel, and Shanghai copper falling more than 2 percent to a three-month low of 56,700 yuan ($9,000) per tonne. That in turn saw selling in commodity-linked currencies such as the Australian dollar, which fell 0.5 percent to $1.0313.
Risk aversion resulted in the first outflow since the end of November in EPFR Global-tracked High Yield Bond Funds last week.
Asian credit markets eased, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 5 basis points.
There's not much optimism out there. We think the second quarter should be the low point of this cycle as far as economic growth is concerned, said Jeremy Friesen, commodity strategist at Societe Generale.
CHINA WORRY OVERDONE?
Investor sentiment has also been hurt by worries about slackening demand from China, the world's second largest economy, after data showing a slowdown in private domestic demand, retail sales and fixed asset investment and a sharp drop in property and home sales, which weigh on construction demand.
But most analysts say the data remains consistent with a soft landing scenario for the Chinese economy.
Worries among international investors appear unjustified, as it would be easy for the government to re-accelerate growth if it chose to do so, said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan, at Credit Agricole CIB.
China's move on Saturday to double the size of the yuan's trading band against the dollar was also seen by investors as a strong signal that Beijing is comfortable with economic growth and believes it has avoided a hard landing.
On the first trading day since the move the yuan opened sharply weaker than the mid-point fixing - the base rate that the central bank uses to flag the government's intentions for its value - but even at its weakest point remained within the boundaries of the old trading band.
The currency fell as far as 6.3250 per dollar - 0.5 percent weaker than the midpoint and 0.3 percent weaker than Friday's close - but pared back much of its early losses to stand around 6.3139, down 109 pips, or 0.17 percent from Friday's close.
TECHNICALS DRIVING SENTIMENT
Some analysts say recent market trends are largely driven by hedge funds, with their similarly programmed trading exacerbating one-way price moves.
Prices have recently been moving sharply while volumes are not picking up necessarily, noted Koichiro Kamei, managing director at financial research firm Market Strategy Institute in Tokyo. That reflects a programming typical for funds aiming to hit specific market levels in thin volume to create a near-term trend and maximise profits in a range-bound market, he said.
Metals for industrial use will face tough times ahead given weak demand outlook as is for oil, but gold will eventually find support from the ongoing euro zone uncertainties, Kamei added.
Italian government will seek to pass new measures this week to foster growth and press its reform agenda.
Investors will also keep an eye on a weekend meeting of the International Monetary Fund, where a plan to raise new resources for the global lender to contain the euro zone debt crisis tops the agenda.
(Additional reporting by Joonhee Yu in Seoul and Manolo Serapio in Singapore; Editing by Alex Richardson)