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Singapore - Asian shares edged down on Tuesday as fears about the ability of politicians on either side of the Atlantic to tackle huge debt burdens sapped investors' confidence in the outlook for Western economies.
The yen weakened as safe-haven demand for the Japanese currency slackened, but the dollar held on to gains and equity volumes were thin, indicating that risk aversion remained high.
The failure on Monday of a "super committee" of US lawmakers to reach agreement on a deficit-cutting plan was another blow to market confidence already hammered for weeks by Europe's inexorably worsening sovereign debt crisis.
US stocks fell around 2% on Monday, following sharp falls in Europe, and commodities also slumped on concerns that the chances of a global recession are rising.
"The S&P index has broken sharply lower and looks technically pretty dire, despite more OK data as the Chicago Fed index bounced slightly and the overhang of unsold homes dipped back to a lower but still high 8 months," said Kit Juckes, head of foreign exchange research at Societe Generale.
Investors' jangled nerves were soothed somewhat in Asia when Standard and Poor's and Moody's, two of the big three ratings agencies, said the deficit committee's failure would not trigger an immediate downgrade of the US credit rating.
Japan's Nikkei share average opened down 1%,, hitting its lowest level in 8 months, then pared losses but then slipped again, shedding 0.7%.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.4 percent, putting it in negative territory for the sixth successive session.
Debt woes
The news that a Congressional committee of six Republicans and six Democrats had abandoned their efforts to reach a deal on reducing the United States' ballooning deficit had been expected, but nonetheless reinforced investors' perceptions that Washington politicians are too divided to deal with the debt problem.
It came as the eurozone's crisis crept ever closer to the heart of the continent, with the risk premiums on Spanish, French, Italian and Belgian government bonds rising after Moody's warned that France's triple-A credit rating was under threat.
"The tightening of credit conditions and pro-cyclical bias of fiscal policy means that the global economy is at serious risk of returning to recession when it has singularly failed properly to recover from the last recession," said Russell Jones, head of global rates strategy at Westpac, in a note.
"Europe is already effectively there. But Japan and the US are looking increasingly likely to follow suit."
Asian credit markets reflected the cautious mood, with spreads widening by 3-4 basis points.
The euro edged up to around $1.35 on Tuesday and the dollar held firm after jumping on Monday. Ironically, the US currency has been boosted by the debt worries because it remains investors' preferred safe haven in times of market volatility.
But demand weakened for the yen, another safe-haven currency, which eased about 0.2% to around ¥77.06 to the dollar and around 0.4% against the euro to near ¥104.0.
In commodities markets, copper rose almost 2% after a three-day slide that had taken it close to its lowest levels in a month on worries that the darkening economic outlook would crimp industrial demand.
There were more modest rebounds for other commodities, with gold rising 0.4% to around $1 685 an ounce and US crude gaining 0.2% to climb above $97 a barrel.
