Tokyo - Asian stocks fell on Thursday, taking the lead from losses on Wall Street, while a rise in euro zone debt yields amid a global bond rout kept the euro hovering at a two-month peak versus the dollar.
As European deflation fears have ebbed, a seeming reversal of trades linked to the European Central Bank's big quantitative easing has resulted in a sell-off in core European bonds and equities this week, rattling investors across asset classes.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.1 percent as China, Hong Kong, Australian, South Korean and Malaysian shares retreated.
The Shanghai Composite Index was down 1.8 percent, extending its losses so far this week to 6.4 percent. The index is up an impressive 28 percent so far this year on views that Chinese policy easing would shore up equities. The steep gains, however, have triggered expectations of a sharp correction.
“Another few such declines and some of the millions of retail investors who have recently piled into the market might start to wonder if it really is a guaranteed way to make 30-40 percent returns every year or not,” analysts at Rabobank wrote in a note.
Tokyo's Nikkei lost 1.1 percent in its first trading day of the week. Japanese financial markets were closed from Monday to Wednesday for public holidays.
US stocks ended weaker on Wednesday after US Federal Reserve Chair Janet Yellen warned of high share valuations, adding to anxiety about future interest rates.
Weak US indicators also added to uncertainty regarding when the first rate hike by the Fed could take place. Data on Wednesday showed tepid private job gains and a second straight quarterly decline in productivity.
Shrinking expectations for an early rate hike - a tightening in June appears less and less likely - weighed on the dollar and helped its counterparts like the yen and euro.
The euro was steady at $1.1333, not far from a two-month high of $1.1371 struck overnight. The dollar stood little changed at 119.56 yen, pulling further away from this week's high of 120.51 struck on Tuesday.
The euro continued to get support from a surge in euro zone bond yields, notably on German Bunds, in light of an easing in deflation fears thanks to improving European data.
German 10-year bond yields hit a four-month high of 0.595 percent overnight. Just last month it had hit a record low of 0.05 percent, when hopes were high that the ECB's trillion euro bond buying quantitative easing programme would drive the yield into negative territory.
French, Dutch, Belgian and Austrian equivalent bond yields also scaled 2015 peaks on Wednesday.
In addition to sending chills through financial markets worldwide, the retreat in euro zone bonds has also weighed on U.S. Treasuries and Japanese government bonds, pushing their 10-year yields to two-month highs.
“The focus is on whether ECB officials will express concerns over the euro's rebound and weaker European stocks, and whether that would halt the rise in Bund yields,” said Masafumi Yamamoto, senior strategist for Monex in Tokyo.
“The euro's bounce could stop if Bund yields steady, but without hints of further ECB easing it could be hard to keep the currency from rising again.”
The pound was shaky against the buoyant euro. Investors were nervous ahead of Britain's election later in the day, which appears unlikely to give one party a majority.
Prime Minister David Cameron's Conservatives and Ed Miliband's opposition Labour Party have been neck and neck in opinion polls for months, indicating neither will win enough seats for an outright majority in the 650-seat parliament.
The euro climbed as far as 74.49 pence, reaching a high last seen in mid-February. It was last at 74.38 pence.
In commodities, US crude slipped on profit taking following an overnight climb to 2015 peaks reached after a first drawdown in US crude inventories since January.
US crude was down 1.1 percent at $60.28 a barrel after reaching a five-month high of $62.58 on Wednesday.
Supported by a weaker dollar, copper on the London Metal Exchange stood near a five-month peak of $6,481 a ton scaled on Tuesday. A weaker dollar makes commodities like copper more affordable to holders of other currencies like the euro.
Reuters