Asian shares slide as upcoming Fed meeting jangles nerves

MSCI's index of Asia-Pacific shares outside Japan fell 0.7%, dragged down by a 0.9% decline in Australian shares

Asian shares slid on Tuesday as investors waited on tenterhooks for news of the US Federal Open Market Committee's plans for its stimulus programme - with the mere suggestion of fine-tuning it enough to unnerve investors.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.7%, dragged down by a 0.9% decline in Australian shares which faced selling in high-yielding stocks.

The pan-Asian index, which plumbed its lowest since September on Thursday, was weighed down by a 1% drop each in its materials and energy sectors.

The Fed's bond-buying programme, along with very accommodative monetary policies by other central banks to promote growth, such as the Bank of Japan, has underpinned market sentiment broadly, providing investors abundant funds they could put to work in higher-yielding "risk" assets, such as shares.

"The Federal Reserve has really been driving the top-down investment themes globally with quantitative easing and record low US rates," said Peter Esho, investment adviser at Wilson HTM. "It has implications really into all other asset classes."

Market volatility was likely to remain elevated until the outcome of the Fed meeting and Bernanke's news conference on Wednesday.

"The sensitivity of asset prices to headlines and seemingly inconsistent moves among them - US Treasury yields moving higher but the US dollar coming under pressure...shows the degree of nervousness and confusion among investors regarding the most likely path of the Fed's monetary policy," Barclays Capital said in a research note.

South Korean shares were trading nearly flat as foreign selling capped prices in a market lacking a clear direction. Hong Kong shares slipped 0.9%.

Japan's benchmark Nikkei stock average deepened losses to fall 0.8% after temporarily seeing positive territory. It climbed 2.7% on Monday.

The dollar rose 0.3% against the yen at 94.73, off its 10-week low of 93.75 yen hit on Thursday, but well below last month's 4-1/2-year peak of 103.74 yen. The dollar index, measured against a basket of six key currencies, was down 0.13%.

Data published on Monday showed unexpected growth in New York state's manufacturing in June, and home-builder sentiment improved to a seven-year high this month, its biggest gain since 2002.

Uncertainty over the Fed's thinking has weighed on the dollar recently, but its fall against the yen has also been linked to speculators and investors cutting back their yen short positions after the Bank of Japan took no action last week to quell a highly volatile domestic bond market.

The sell-off in the Nikkei, sparking yen buying, erased gains made since the central bank's big-bang stimulus unveiled on April 4, which had helped propel the index up to a 5-1/2-year high last month. Growing views that Prime Minister Shinzo Abe may not deliver as aggressive a reform as previously hoped for also led to the unwinding of short-yen and long-Nikkei positions.

"The Fed is likely to stress its commitment to stimulus and signal that any tapering will not mean tightening liquidity," said a senior official at a big Japanese investor.

At a meeting of leaders of the Group of Eight developed countries on Monday, the euro zone came under pressure to press on with a banking union and Japan was urged to follow up on massive central bank stimulus with structural reforms and measures to tackle its budget deficit.

The G8 said in a statement world economic prospects remained weak even though downside risks have lessened due partly to policy action taken in the United States, the euro zone and Japan.

US crude futures inched up 0.1% at $97.84 a barrel and Brent also was up 0.1% to $105.53.