Asian shares fall as stimulus hopes fade, China PMI softens

Reuters: Asian shares extended losses on Wednesday as a softer Chinese manufacturing data further undermined the fragile market sentiment as expectations faded of stimulus action this week by the U.S. Federal Reserve and the European Central Bank.

China’s official factory purchasing managers’ index inched down to 50.1 in July, below expectations and down from 50.2 in June, marking the lowest reading since November.

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.

India and South Korea both report their latest manufacturing data later on Wednesday.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5 percent after four days of gains, deepening losses from a 0.2 percent drop before the Chinese data. 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 eased 0.1 percent and its currency inched down to $1.0470 from around $1.0482 before the data, and retreating further 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 slid 1.3 percent.

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.

As traders scaled back expectations for policy actions this week, risk aversion returned.

Few analysts expect the Fed to launch more easing at the end of its two-day meeting later on Wednesday, but it is expected to reinforce a commitment to an accommodative stance and could drop hints about more measures in coming weeks.

Pressures for an imminent Fed action have eased as Tuesday’s reports beat expectations in regional manufacturing in the U.S. Midwest, home prices, and consumer confidence, coming ahead of a key nonfarm payrolls and two larger national manufacturing data.

“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.

“Nonetheless, investors are largely mixed on what they feel the Fed will do going forward,” Vecchio said.

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 0.2 percent to $1.2285, 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 0.3 percent to 95.76 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.

The ECB meets on Thursday.

European shares fell on Tuesday on fresh doubts over whether the ECB could agree on concrete measures to tackle Europe’s sovereign debt crisis. Germany’s finance ministry reiterated its opposition to granting a banking licence to the euro zone’s new bailout fund, a move that could let it buy virtually unlimited amounts of debt issued by troubled euro zone states.

Yields on Spanish and Italian 10-year bonds inched higher on Tuesday on growing wariness over a potential policy move, but stayed below critically high levels.

Euro zone’s fiscal woes have hit the region’s economy hard, with the latest report from the European Union showing that joblessness in the euro zone hit its highest level in June since the single currency was born.

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 slightly with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 1 basis point after falling to its lowest since early April on Tuesday.