Asian shares fell on Wednesday as soft Chinese manufacturing data further undermined investor confidence and as hopes faded of stimulus action this week by the U.S. Federal Reserve and the European Central Bank.
China's official factory purchasing managers' index fell to an eight-month low of 50.1 in July from 50.2 in June, suggesting the sector is barely growing. Analysts had expected it to edge up to 50.3.
The data underscored how the world's second-biggest economy was losing momentum, and followed signs of decelerating Asian growth, with major Asian exporters Japan, South Korea and Taiwan all reporting worsening economic stress on Tuesday.
Markets trimmed some of the losses after a slightly better showing in a private HSBC Purchasing Managers' Index (PMI) For China, which rose to a seasonally adjusted 49.3 in July, its highest since February. But July marked the ninth straight month when the private-sector PMI was below 50, the threshold dividing expansion from contraction.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> fell as much as 0.6 percent after four days of gains, before recovering to fall 0.2 percent. It hit its highest level since May 11 on Tuesday, ending July with a 3.6 percent gain, slightly ahead of June's 3.5 percent rise.
Shares in Australia <.AXJO> eased 0.2 percent and its currency inched down 0.1 percent to $1.0488, retreating from Tuesday's four-month high of $1.0539. Australia is sensitive to Chinese economic data as China is its single largest export market.
Japan's Nikkei stock average <.N225> slid 1.1 percent. <.T>
"It is clear that the manufacturing sector is doing very poorly, and requires policy support," said Dariusz Kowalczyk, senior economist & strategist, Asia ex. Japan at Credit Agricole CIB.
The dollar fell to a two-month low against the yen below 77.94 yen in a knee-jerk reaction before inching back up to around 78 yen.
Concerns about demand from China pushed copper down 0.2 percent to $7,546.75 a tonne while oil fell, with Brent falling 0.1 percent to $104.79 a barrel and U.S. crude down 0.1 percent at $87.97.
As traders scaled back expectations for policy actions this week, risk aversion returned.
The Fed is not expected to launch more easing at the end of its two-day meeting later on Wednesday, but likely reinforce a commitment to an accommodative stance and could drop hints about more measures in coming weeks.
"We are looking for, at most, a chance in the Fed's language that extends low rates through at least early-2015, which won't be the stimulus bump market participants have been hoping for," said Christopher Vecchio, currency analyst at DailyFX.
ECB MEETS THURSDAY
The situation in Europe was far more unsettling, with no apparent consensus emerging on contentious issues, while analysts and traders see any action from the ECB may only give a temporary relief for strained bond markets in the euro zone.
The euro eased 0.1 percent to $1.2291, off Tuesday's high around $1.2330 and below a three-week high of $1.2390 touched on Friday. It has stayed above a two-year low around $1.2042 reached last week. The euro fell 0.2 percent to 95.81 against the yen.
"Even if the ECB manages to deliver a policy response which genuinely stabilises peripheral bond yields, the EUR is likely to remain soggy for some time on a weak European growth profile and ongoing bank deleveraging," ANZ said in a research note.
Doubts over whether the ECB could agree on concrete measures to tackle Europe's sovereign debt crisis were highlighted on Tuesday when Germany reiterated its opposition to granting a banking licence to the euro zone's new bailout fund.
Yields on Spanish and Italian 10-year bonds inched up on growing wariness over a potential policy move.
The European Union's report on Tuesday showed that joblessness in the euro zone hit its highest level in June since the single currency was born.
BONDS OVER STOCKS
Data on Tuesday showed EPFR global-tracked bond funds took in $223.2 billion while equity funds surrendered $31.4 billion so far this year to the week ending July 25, in line with cautious investor approach to risk.
Asian credit markets weakened with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 3 basis points, but still near its lowest since early April hit on Tuesday.
Japanese government bond prices snapped a four-day losing steak on Wednesday, with benchmarks yields off three-week highs.
The euro zone debt crisis has spurred a structural shift in global investor decisions favouring bonds issued by the United States, Germany and Japan.
"Stocks globally have been failing to draw investor appetite despite being left at attractive levels, where dividend and earnings yields stood well above government bond yields, a condition which normally triggers a stock market rally," said Naohiko Baba, Japan chief economist at Goldman Sachs.
As the foreign presence in the Japanese stock market declined while growing appetite for sovereign bonds boosted the appeal of Japanese government bonds, outstanding foreign investor holdings of JGBs and Japanese stocks have become nearly equal at around 80 trillion yen as of end-March 2011, Baba said.
(Additional reporting by Ian Chua in Sydney; Editing by Michael Perry & Kim Coghill)