Asian stocks hit 3-week lows as China gloom spreads

By Saikat Chatterjee

HONG KONG (Reuters) - Asian stocks fell to three-week lows on Tuesday as a deepening rout in Chinese stocks erased risk appetite - sending investors flocking to safe-haven instruments such as government bonds and the Japanese yen.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.8 percent in early deals, its lowest level since July 9 as mainland Chinese indexes opened 2- 5 percent lower.

"Volatility is the enemy of investor appetite," said the head of index trading at a U.S. fund. "Any sign of government support to prop up the market will be used by investors to exit the market completely rather than add fresh positions."

Since hitting a peak in early June, Chinese shares have gone through a roller-coaster ride with main China indexes falling by a third in less than a month before rebounding by a quarter, only to stage its biggest one-day fall since 2007.

While broader Asian markets have been initially resilient to the fireworks in Chinese stocks, they have started to move more closely in step with the mainland over recent days in the absence of fresh triggers elsewhere.

Correlations between the MSCI gauge for regional stocks and the Shanghai index <.SSEC> has risen to 0.5 - its strongest in nearly a year - indicating the market rout is starting to have a broader regional impact.

Tokyo's Nikkei fell more than 1 percent, with a strong yen accelerating the decline. Australian shares fell 0.9 percent and South Korea's Kospi shed 1 percent.

Investor sentiment was also cautious ahead of a two-day U.S. Federal Reserve meeting beginning later today where some investors believe the Fed's rate-setting Open Market Committee will make its case for hiking rates as early as September.

Overnight, the Dow dropped 0.7 percent and Nasdaq fell 1 percent while share indices in Frankfurt and Paris tumbled more than 2.5 percent.

In currencies, the dollar was on the back foot at 123.12 yen as safe-haven assets were boosted by market jitters, offsetting upbeat U.S. durable good orders data.

The euro was little changed at $1.1091 after surging to a two-week high of $1.1129 overnight thanks to a bullish Ifo survey of German business sentiment.

Bonds were the solitary bright spot in Asia with U.S. Treasuries and Japanese government debt standing tall in a sea of red across stock markets as investors dumped riskier bets.

Ten-year Japanese bond yields held firm at 0.40 percent, from 0.55 percent two weeks earlier, a large move for the markets while 10-year U.S. Treasuries held at 2.2 percent.

Oil struggled at four-month lows after the Chinese stock market crash fuelled worries the world's biggest energy consumer may cut back and as more evidence emerged of a global crude supply glut.

U.S. crude was down nearly a percent at $46.98 a barrel, near $46.91, its lowest since late March.

Copper, heavily influenced by demand from key consumer China, languished near a six-year low of $5,164 a tonne on the London Metal Exchange.

The broader Thomson Reuters CRB commodities index also hit a six-year low.

(Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Eric Meijer)