Asian shares rebounded on Thursday but sentiment was vulnerable due to uncertainty over a bailout for Spain and signs of Europe struggling to find a unified approach to tackling its debt crisis as global lenders wrangled over Greek restructuring.
A recovery in Chinese shares pulled the MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> out of the negative territory to trade up 0.5 percent. The index fell to its lowest point since September 14 on Wednesday, wiping out almost all the gains made after markets rallied on the U.S. Federal Reserve's new quantitative easing stimulus to boost job creation.
Worried about the impact of the global economic slowdown on corporate earnings, investors drove the Shanghai Composite <.SSEC> down to its lowest close since February 2009 on Wednesday at 2004.2, levels perceived by market players as key in prompting authorities to take steps to prop up the market.
Hong Kong and domestic Chinese stock markets have also been undermined by a lack of action by their central banks in the wake of global easing from the United States to Japan.
China cut interest rates twice in June and July and lowered banks' reserve requirement ratio three times since late 2011, but has refrained from cutting interest rates or RRR since July, though it has kept money markets liquid.
Hong Kong shares <.HSI> rose 0.5 percent, with traders saying prices were lifted by some adjustments ahead of the third-quarter end and short covering in bank stocks, while Shanghai shares <.SSEC> inched up 0.3 percent.
"Shanghai shares approaching the low end to the downside prompted investors to buy back shares as the level reflects an excessively bearish sentiment and offers a bargain," said Hirokazu Yuihama, a senior strategist at Daiwa Securities.
"But there won't be much to the upside as worries about Spain will cap prices," Yuihama said.
"Markets may be hoping for a central bank stimulus, but I think China's aim is to achieve a soft landing and not to beef up fundamentals greatly. China may be feeling that measures taken so far are sufficient to achieve that goal," he added.
Instead cutting interest rates or lowering banks' reserve requirements further, China has been pumping in ample funds to the markets.
China's central bank injected a net 365 billion yuan ($57.92 billion) into money markets this week, traders said, the largest weekly injection in history, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.
Japan's Nikkei stock average <.N225> bucked the broader Asian trend, hovering just above a fresh two-week low. <.T>
SPAIN UNVEILS BUDGET
Despite worries about Europe denting sentiment, asset prices broadly remained in recent ranges.
"Economic data seems encouraging in the U.S., concern is rising in Asia and some element of disbelief on the European scene," Sebastian Galy, strategist at Societe General, said in a note. "That disbelief in Europe needs to be more severe for an actual full scale correction, though rising volatility may be enough to trigger a further forced reduction in some peripheral assets."
The euro traded at $1.2873, not far from a two-week low of $1.2835 touched on Wednesday.
The yen was at 77.67 yen, staying near a one-week high of 77.585 hit on Wednesday.
Growing investor risk aversion lifted the CBOE Volatility index <.VIX>, a gauge of expected volatility in the Standard & Poor's 500 index <.SPX>, up 8.94 percent on Wednesday for its biggest daily increase in 2-1/2 weeks, after it hit a three-week high.
As protestors against severe austerity measures took to the streets and clashed with police in Spain and Greece, European equities saw their worst day in two months. Spanish 10-year bond yields rose back above 6 percent for the first time since the European Central Bank said on September 6 that it would buy sovereign bonds of euro zone states which request a bailout, aiming to trim borrowing costs.
Spanish Prime Minister Mariano Rajoy presents a series of reforms and a tight 2013 budget on Thursday, while gradually moving towards seeking a sovereign bailout, which would activate the ECB's bond-buying scheme.
Spain also faced Moody's latest credit rating review and an independent audit's stress test showing how much more money Madrid will need to strengthen its shaky banking sector.
Greece's international lenders remained divided over how to approach Athens' debt restructuring as creditors seek to minimize losses on their exposure.
The dollar index <.DXY> measured against a basket of currencies eased 0.1 percent to 79.789, off a two-week high of 80.012 reached on Wednesday. A weaker dollar helped a modest recovery in dollar-denominated industrial commodities such as oil and copper, as well as gold.
U.S. crude inched up 0.2 percent to $90.18 a barrel and Brent edged up 0.1 percent to $110.14. London copper was up 0.3 percent at $8,142 a metric ton. Spot gold traded up 0.1 percent to $1,753.60 an ounce.
Not all Asian countries are in need of immediate stimulus, however, as the Philippines' central bank governor told Reuters on Wednesday. He said the Phillipines' domestic demand remained buoyant despite the global slowdown dampening exports.
Asian credit markets were marginally firmer, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by one basis point.
(Additional reporting by Vikram Subhedar in Hong Kong Joyce Lee in Seoul; Editing by Eric Meijer/Simon Cameron-Moore)