Asian shares fell on Thursday as Federal Reserve Chairman Ben Bernanke put the brakes on a recent rally by curbing optimism about the strength of the U.S. economic recovery, but without signalling any further monetary easing to stimulate growth.
Chinese official and private-sector factory data also reminded investors of the fragile state of the global economy, while suggesting Beijing could avoid a hard landing.
The recent rise in equities was for the most part due to ample liquidity so when expectations for further easing fade, that element will be stripped and may weigh on equities, said Masafumi Yamamoto, chief forex strategist at Barclays Capital.
At the same time, fundamentals may not be so bad as to warrant further stimulus from monetary easing.
The MSCI Asia Pacific ex-Japan <.MIAPJ0000PUS> fell 0.7 percent after rising 1.4 percent to a seven-month high on Wednesday.
Financial spreadbetters expected major European markets <.FTSE> <.FCHI> <.GDAXI> to open flat. <.L> <.EU>
Data from China on Thursday kept alive hopes the world's second-biggest economy can avoid a hard landing, but also underscored the formidable headwinds facing the country as exports falter.
China's official purchasing managers' index rose to 51.0 in February from January's 50.5, as the factory sector grew more than expected with export orders expanding for the first time in four months.
The HSBC Flash PMI, a private sector survey that is the earliest indicator of China's industrial activity, hit a 4-month high of 49.7 in February, but new export orders shrank the most in 8 months as global demand weakened.
The headline number improved, but the outlook is not very promising as inventory built up quickly and new orders only rose slightly. Other evidence from loan supply and sector-level data also signals further weakness, said Nomura's chief China economist, Zhang Zhiwei.
Markets are bracing for more factory data, including the U.S. ISM manufacturing PMI and euro zone Markit manufacturing PMI due later in the day.
Data on Thursday showed Japanese companies unexpectedly raised expenditure in October-December from a year earlier, raising hopes that fourth-quarter GDP may be revised to a positive figure.
Japan's Nikkei <.N225> wiped out early gains to fall 0.4 percent, moving away from a seven-month high hit on Wednesday.
Sentiment in Asian credit markets was also cautious, with the spreads on the iTraxx Asia ex-Japan investment-grade index widening by a couple of basis points.
The euro edged up 0.2 percent to $1.3350. It fell more than 1 percent on Wednesday as the European Central Bank extended 530 billion euros ($709 billion) in cheap, 3-year loans. More than 800 banks applied for funding, up from 523 banks in its first auction in December.
The dollar held its ground after rising strongly on Wednesday when Bernanke stopped short of signalling further Fed bond purchases, disappointing investors who were hoping for more stimulus.
Spot gold jumped 1.7 percent on Thursday to $1,724 an ounce after plunging 5 percent to below $1,690 an ounce on Wednesday as funds exited the bullion trade on speculation that central banks might be done with easy monetary policies.
Copper was guarded with a modest gain of 0.3 percent to $8,522 a tonne, as investors looked for greater motivation to take the market higher.
INFLATION AND DOLLAR
Oil steadied after two straight days of losses, with U.S. crude hovering near $107 a barrel and Brent crude
up 0.1 percent to $122.78 a barrel.
Some analysts took note of Bernanke's comments as dollar supportive.
The U.S. dollar pushes higher while equities retreat alongside metals as Bernanke gives a nod to inflation, departing from his last three speeches where he accentuated the extension of extremely low interest rates into 2014, said Ashraf Laidi, chief global strategist at City Index Group.
Bernanke described rising gasoline prices as primarily reflecting higher global oil prices -- a development that is likely to push up inflation temporarily while reducing consumers' purchasing power, adding that the Fed would continue to monitor energy markets carefully.
Bernanke seems to suggest the Fed is passively retreating from a dovish stance, encouraging markets to speculate that there will be no more easing, and allowing the dollar to firm to help contain inflationary pressures, Barclays' Yamamoto said.
($1 = 0.7476 euros)
(Additional reporting by Kevin Yao and Aileen Wang in Beijing; Editing by Richard Pullin)