Tokyo - Asian shares look set to retreat and oil prices to resume their descent after investors used rebounds over the last two days to offload risk assets as fears of a global economic slowdown show no sign of abating.
Japan's Nikkei fell 2.2 percent while South Korean shares dropped 0.6 percent. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.3 percent after two days of gains.
“Wherever you look - China, oil and the US, there is no clear evidence of improvement in economic fundamentals. So in the near term, it is hard to expect risk asset prices to gain further after a spate of short-covering,” said Tatsushi Maeno, managing director at PineBridge Investments.
Crude oil prices fell on Monday, wiping out much of the price gains made on Friday, not helped by the news that Iraq's output reached a record last month, deepening concerns of oversupply.
Oil prices have fallen more than 75 percent from their 2012 peaks as global output was boosted by US shale oil production and demand growth turned tepid, partially caused by the Chinese economy's slowing growth.
The massive price fall is putting a huge pressure on profitability of energy firms worldwide, which are in turn slashing investment.
The US S&P fell 1.6 percent to 1,877.08, led by 4.5 percent drop in the energy sector.
Brent crude futures, the global benchmark, settled 5.2 percent lower on Monday at $30.50 a barrel while US crude futures dropped 5.8 percent to $30.34 per barrel on Monday. In early Asian trade on Tuesday, the US futures fell another 1.5 percent to $29.88.
In the currencies, resurgent risk aversion helped to lift the yen to 118.35 to the dollar from its two-week low of 118.88 hit on Friday.
The euro also gained against the dollar to $1.0852, 0.6 percent above late last week and having recovered about half the losses seen on Thursday when European Central Bank President Mario Draghi indicated more stimulus in March.
Currencies closely linked to energy and commodities are struggling, with the Canadian dollar slipping back towards the 13-year low it set last week.
But the US Federal Reserve's policy statement due on Wednesday followed by the Bank of Japan's announcement on Friday could possibly change investors' sentiment, many market players say.
Fed officials have so far stuck to the line that the bank would be ready to raise interest rates four times this year despite market volatility as the US economic expansion continues.
Investors have difficulty believing such a policy tightening is possible under the current unstable economic and market conditions, with federal fund rate futures pricing in just over one rate hike this year.
Some investors hope a more dovish tone out of the Fed would help to soothe market sentiment, given that the perception gap between markets and policymakers has been a major source of anxiety.
Speculation that the Bank of Japan could step up its stimulus this week is also rising, although many market players still think the BOJ will hold fire for now.
REUTERS