By Lisa Twaronite
TOKYO (Reuters) - Asian shares pulled away from this week's three-year highs on Friday after a mostly flat day on Wall Street, though a fresh S&P closing record and upbeat U.S. employment data underpinned sentiment.
Overnight data from France and Germany showed business activity in those countries strengthened in both July and June, but risks to the euro zone economy from any tougher sanctions on Russia limited the euro's gains.
A survey on Thursday from China showing factory activity expanded at its fastest in 18 months in July also continued to give cautious markets a lift.
MSCI's broadest index of Asia-Pacific shares outside Japan was down about 0.3 percent in early trade, though still on track for solid weekly gain of more than 1 percent, while Japan's Nikkei stock average added 0.6 percent, poised to rise 1 percent for the week.
"The prospect for the global economy has not been too bad thanks to recently strong U.S. shares and China data, but we should not be overly optimistic," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
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Fujito said that long-only investors have stayed on the sidelines as geopolitical concerns in Gaza and Ukraine have curbed their appetite for risk. He also said that investors are waiting for more positive trading cues, after the International Monetary Fund cut its 2014 forecast for global economic growth.
On Wall Street overnight, the S&P 500 eked out a slight gain to its second record closing high in a row, even after earnings painted a mixed picture of the economy. [.N]
After a run of solid tech sector results this week, Amazon reported a much bigger loss than expected, even as sales of the biggest U.S. online retailer surged. Shares tumbled 10.6 percent in after-hours trade, wiping more than $17 billion from its market valuation.
Still, investors took heart from data released on Thursday which showed U.S. initial jobless claims declined 19,000 to a seasonally-adjusted 284,000 for the week ended July 19. That was the lowest since February 2006.
A separate report showed U.S. new home sales dropped 8.1 percent in June, their biggest decline since July last year. But economists noted that other data has pointed to housing getting back on track after stalling late last year.
"There is no question that the labour market is strengthening but the pace of improvement is still falling short of the Fed's expectations," Kathy Lien, managing director of FX strategy at BK Asset Management, wrote in a note to clients.
Fed Chair Janet Yellen said last week that the Fed could raise rates sooner than initially expected if labour markets continued to improve. Most economists expect the U.S. central bank to start raising interest rates in the second half of next year.
Ongoing unrest in the Middle East and Ukraine continued to keep investors alert for any developments that could have a wider impact on risk sentiment and markets.
Gaza authorities said Israeli forces shelled a shelter at a U.N.-run school on Thursday as any truce remained elusive. Meanwhile, a U.S. State Department spokeswoman said that Russia was firing artillery across its border with Ukraine to target Ukrainian military positions.
EURO MOVES OFF 8-MONTH LOW
Upbeat data helped the euro climb off an eight-month low of $1.3438 touched on Thursday. The common currency was steady on the day in Asia at $1.3465.
The dollar was little changed against the yen at 101.78 after spiking more than 0.3 percent overnight to a two-week high of 101.86 yen after the U.S. jobless claims data.
The greenback, which has been closely correlated to U.S. yields, got a lift as U.S. Treasury yields rose after the benefit claims report. For the week, it was poised to gain about 0.4 percent against the Japanese currency.
The yen showed little reaction to Japanese consumer price data released early on Friday that was in line with forecasts and did not do much to stir expectations for further monetary easing by the Bank of Japan. Core consumer prices rose 3.3 percent in June from a year earlier, matching forecasts.
Gold was steady at $1,292.70 an ounce after dropping to a one-month low overnight on the improved U.S. and European economic data, though the Gaza and Ukraine tensions limited losses by supporting demand for safe-haven assets.
U.S. crude edged down about 0.2 percent to $101.91 a barrel.
(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Eric Meijer and Richard Borsuk)