Asian shares hit five-week lows and the euro fell on Wednesday, as investors grew edgy ahead of a pivotal European Central Bank meeting on Thursday and U.S. payroll data on Friday.
Investors braced for the possibility that the ECB will act less boldly than they earlier hoped. Still, if the ECB disappoints and the U.S. data is bad, that should boost chances government need to take more action to counter global woes.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> tumbled 1 percent to a five-week low, with its materials sector <.MIAPJMT00PUS> by far the worst performer with a 2 percent slump, and dragging resource-rich Australian shares <.AXJO> down 1 percent to a one-month low.
The pan-Asian index has now wiped out all the gains built through the summer break on comments in early August by ECB President Mario Draghi that bolstered hopes for decisive action to deal with the three-year-long euro zone debt crisis.
Japan's Nikkei stock average <.N225> slid 0.7 percent to a four-week low. <.T>
"It's a correction as we get nearer to Thursday," said Frances Cheung, senior strategist at Credit Agricole CIB in Hong Kong. "Hopes for more policy support were sustained during the summer because there were no major deadlines, but now we do have deadlines, and the risk is, there could be some disappointment."
"So it's very natural for investors to keep themselves to the sidelines and to prepare for any tail risk, like the ECB not delivering," she said.
Cheung said she expects investors to view bad data as pointing to more policy measures aimed at supporting markets.
European shares fell and U.S. stocks closed mixed while the euro slid on Tuesday. U.S. Treasuries gave back some of Friday's gains and two-year Spanish and Italian yields fell.
An Institute for Supply Management survey on Tuesday showed U.S. manufacturing shrank in August at its sharpest clip in more than three years, the latest sign that the slowing global economy is weighing on the fragile U.S. recovery.
But U.S. automakers turned in their best August since before the 2007-09 recession. That suggests consumers may continue to benefit from low interest rates, helping to support that part of the manufacturing sector, Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. LLC, said in a note.
The euro slipped 0.2 percent but traded within recent ranges at $1.2540, while the dollar inched up 0.1 percent against the yen to 78.45 yen.
Market expectations for additional monetary stimulus from the U.S. Federal Reserve gained momentum after Fed Chairman Ben Bernanke last Friday said the Fed was ready to act if needed. His comments weakened the dollar and pushed down Treasury yields.
"The Fed is likely to ease further this month but exactly what options it will take will depend on data. So until we see the jobs report, we can't push markets either way," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
Investors likely took profits on Treasuries and bought back the dollar as they adjusted positions, he said, adding the dollar may stay firm against the yen with stops eyed around 78.55-78.60 yen and offers near 78.70-78.80 capping the upside.
U.S. employers likely added 125,000 workers in August, but the jobless rate is seen steady at an elevated 8.3 percent, posing a major drag on the economy. The Fed meets on September 12-13.
For the ECB, markets expect the bank to outline its bond-buying programme aimed at driving down the yields of highly indebted countries such as Spain to reduce the cost of their financing.
Some expect the ECB may offer some details such as identifying maturities of bonds it intends to buy, most likely two to three years.
GROWTH CONCERNS REMAIN
The Australian dollar hit a fresh six-week low around $1.0190, hit by the economic slowdown in China, the world's second-largest and Australia's largest export market.
Australia's economy enjoyed solid growth last quarter but an interest rate cut may be in store to protect growth.
Falling prices of Australia's key exports such as iron ore due to slackening Chinese demand have forced miners to cut capital spending as well as their expansion plans.
Steel futures in Shanghai sank to an all-time low of 3,255 yuan on Wednesday while iron ore <.IO62-CNI=SI> dipped below $87 a tonne on Tuesday to its lowest since October 2009.
"With what's happened with commodity prices in the last couple of months, the income story is turning against us in a fairly significant way. That insulation does look like it's a little frayed," said Michael Blythe, chief economist at the Commonwealth Bank of Australia.
From China, the HSBC services sector Purchasing Managers' Index fell to 52.0 in August from 53.1 in July for its slowest pace of growth in a year, following gloomy manufacturing polls released earlier in the week.
Growing expectations for more accommodative monetary policy boosted the appeal of gold as a hedge against future inflation risks. Spot gold eased 0.1 percent to $1,692.29 an ounce, off a six-month high of $1,698.45 reached on Tuesday.
Oil was mixed, with U.S. crude up 0.1 percent to $95.38 a barrel while Brent fell 0.2 percent to $113.98.
(Additional reporting by Miranda Maxwell; in Melbourne; Editing by Richard Borsuk)