Asian shares sag to 2013 lows on Fed stimulus jitters

By Chikako Mogi

TOKYO (Reuters) - Asian shares tumbled to fresh 2013 lows on Thursday as growing uncertainty on whether the U.S. Federal Reserve would roll back its stimulus this year kept markets on edge, while turbulence in Japanese equities led to choppy dollar-yen trade.

European stock markets looks set to stay under pressure, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX to open down as much as 0.2 percent. But a 0.3 percent rise in U.S. stock futures pointed to some stability on Wall Street after Wednesday's slide.

MSCI's broadest index of Asia-Pacific shares outside Japan extended losses to drop as much as 1.2 percent to its lowest since late November. It had just snapped a four-day losing streak on Tuesday.

Global equity markets have been hit recently by the Fed stimulus concerns, a string of weak data in China and further evidence of a deep slump in Europe. The fierce selloff in Japanese equities in the past two weeks has amplified the sour mood, as it threatened to undermine Japanese policymakers' ambitious efforts to revive the world's third-biggest economy.

Investors in Asia remained reluctant to plough money into equities.

Australian shares, tracking Wall Street's overnight fall, were off 0.8 percent after hitting a fresh 4-1/2-month low earlier. Hong Kong shares were headed for a sixth loss in seven days, with Shanghai shares also down. The fall in U.S. equities triggered by soft U.S. data spurred safe-haven bids into U.S. Treasuries on Wednesday.

The recent batch of mixed U.S. data has left investors caught between fears the Fed will reduce its stimulus and worry that the economy is still weak.

Wednesday's ADP private sector data showed companies had picked up the hiring pace in May, though job growth remained sluggish, while the Fed's Beige Book report provided a similarly sober reading on hiring.

The data suggested U.S. labour conditions may not yet prompt the Fed to trim its massive bond-buying programme. Still, it has sharpened the markets' focus on the more important monthly nonfarm payrolls data due on Friday.

"It means the Fed is between a rock and a hard place... There is not really much they can do," said Credit Suisse equity strategist Damien Boey in Sydney.

The U.S. central bank has made an improving jobs situation a precondition for softening its strong stimulus measures.

Japan's Nikkei stock average ended down 0.9 percent on a day of gyrations. The index shed as much as 1.2 percent to a two-month-low earlier, then rebounded to be up 1.7 percent before giving up all gains.

On Wednesday, the Nikkei skidded 3.8 percent, extending a selloff that began on May 23, a day after Fed Chairman Ben Bernanke suggested the U.S. central bank could start paring bond purchases as soon as the Fed's next few meetings if the economy improves further.

The Japanese equity market was undermined on Wednesday by disappointment that Prime Minister Shinzo Abe's latest tranche of measures to revive the world's third-biggest economy had dodged some of the tough decisions.

"The recent fall in share prices may be a signal from market players that the government should remain committed to delivering effective policies and not be complacent about a weaker yen or a rising Nikkei," said Tetsuya Inoue, a senior researcher at Nomura Research Institute.

"But the Nikkei now offers a good value for long-term investors who missed the sharp and rapid rally into the May peak," Inoue said, referring to its 5-1/2-year high scaled just before the sell-off.

Currency markets have been taking their cues from the Nikkei and the volatility in Japanese equities spurred choppy trading in the dollar against the yen. The dollar was up 0.3 percent against the yen at 99.35, after suffering a one-percent fall overnight.

"The dollar's longer-term bullish outlook remains intact as the Fed will eventually start scaling down its stimulus if jobs continue to be added, while the Bank of Japan will expand its monetary base," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

"Current market sentiment is very bearish, but it's hard to see a sharper dollar selling from here."

The euro was steady around $1.3092, showing resilience despite weak data and ahead of the European Central Bank's policy meeting later in the day.

The slump in stocks took a toll on Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index widening 7 basis points to around 129, its highest in about seven months.

Some analysts expect the credit markets to stabilize soon.

"I don't see any sustained weakness after the recent spread widening as it is debatable the U.S. economic numbers will show consistent strength. We have a neutral position on duration," said Thomas Kwan, head of fixed income at Harvest Global Investments Limited in Hong Kong.

U.S. crude futures rose 0.3 percent to $93.98 a barrel while Brent inched up 0.1 percent to $103.14.

(Additional reporting by Maggie Lu Yueyang in Sydney and Umesh Desai in Hong Kong; Editing by Richard Borsuk and Shri Navaratnam)