Tokyo - Asian shares retreated from a two-week high on Friday as investors scaled back their expectations of strong stimulus from the US Federal Reserve and fretted about economic growth after manufacturing surveys from the eurozone and China depicted a bleak outlook.
But the euro was underpinned by sustained hopes of European Central Bank action to rein in surging sovereign debt yields in Spain and Italy, which have prompted investors to close their extremely bearish bets against the single currency.
MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1%, wiping out the previous day's gains. Its materials sector led the declines on concerns over weak demand stemming from sluggish Chinese manufacturing activity, sending shares of resources-rich Australia down 0.8%.
Japan's Nikkei stock average slid 1.2%.
"It just wasn't a good day news flow-wise, with QE3 expectations taking a hit and worries over Greece cropping up once more, but rest assured there isn't going to be a massive exodus of foreign capital," said Song Chang-suk, an analyst at Hanyang Securities, of Korean stocks, which slumped 1.1%.
James Bullard, president of the Federal Reserve Bank of St. Louis, a non-voting member of the Fed, said that US data has been somewhat better since early August and the minutes were "a bit stale", referring to the Fed's July 31-August 1 discussions that indicated a third round of monetary stimulus, or quantitative easing (QE3), might be in store.
Bullard's comments, and business surveys in China and the eurozone showing the world economy was slowing down, put a brake on a global market rally that had been spurred by the minutes released on Wednesday.
US manufacturing activity improved slightly in August, but weekly jobless claims unexpectedly ticked higher last week.
A Reuters poll showed on Friday that big Japanese manufacturers' sentiment worsened in August, with Europe's debt crisis, a global slowdown and a stubbornly strong yen taking their toll on the export-reliant economy.
Oil eased, with US crude down 0.5% to $95.77 a barrel and Brent falling 0.4% to $114.59.
Copper fell 0.8% to $7 620.25 a tonne on demand worries, giving back gains that lifted prices to a one-month high on Thursday.
With the retreat in shares, Asian credit markets weakened, pushing the spread on the iTraxx Asia ex-Japan investment-grade index wider by 3 basis points.
The euro traded at $1.2560, near a seven-week high of $1.2590 hit on Thursday. The dollar inched up 0.2% to ¥78.61.
"All of what's been out so far regarding the eurozone is not a 'done deal', and could be interpreted both positively and negatively, but because there is no clear sense of direction, investors are covering short positions in the euro," said Junya Tanase, chief currency strategist at JPMorgan Chase.
"There is still some more scope for the euro short-covering given the size of such positioning, unless conditions deteriorate significantly," he said, adding that one such gauge would be a jump in 10-year Spanish yields above the critical 7% widely seen as unsustainable for a country's financing.
The outlook for US monetary policy remains unclear, but the ECB earlier this month indicated it may resume buying government bonds to drive down borrowing costs in Spain.
Investors have been pinning hopes the bank will soon provide details of its bond-buying scheme, as early as at its September 6 meeting.
Markets also expect a favourable German Constitutional Court ruling on the eurozone bailout fund, scheduled for September 12, to pave the way for a funding safety net against the debt crisis.
European leaders, returning from their summer vacation, have resumed negotiations over aid to troubled Greece and Spain.
Three sources with knowledge of the matter told Reuters on Thursday that Spain was in talks over possible aid, although the country has not made a final decision to request a bailout and no specific figure for aid has been discussed.
Germany and France kept pressure high on Greece on Thursday, telling Athens it should not expect leeway on its bailout agreement unless it sticks to tough reform targets. Leaders of Germany and Greece meet later on Friday.
With talks ongoing in an attempt to resolve the eurozone's three-year debt crisis, Morgan Stanley said it remained bullish on risky assets and was selling currencies that benefited from money flows into safe-havens through early summer, mainly against the euro.
That is bearish for the yen, one such safe-haven currency.
"Amid rallying asset prices, investors seeing better risk/reward ratios in higher yielding currencies will reallocate portfolios away from the JPY, in our view," it said.
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