Asian shares paused on Tuesday as investors awaited Federal Reserve Chairman Ben Bernanke's view on the US economy later in the day, after weak US retail sales and a lower International Monetary Fund global growth forecast raised hopes of more stimulus from the Fed.
MSCI's broadest index of Asia-Pacific shares outside Japan was nearly flat, after managing small gains the day before, while Japan's Nikkei stock average opened up 0.2% after a public holiday on Monday.
Bernanke, set to appear at the semi-annual congressional testimony on Tuesday and Wednesday, is expected to reiterate the bank's stance that it will take further action only if economic conditions worsen.
US retail sales fell across industries in June for the third straight month of declines, the longest run of consecutive drops since 2008 when the country was mired in recession, fuelling investor concerns as the retail sector drives about two-thirds of the US economy.
"I still don't see why the US economy should slide back into recession. Slow growth is much more likely than no growth from here. But bears will growl," said Kit Juckes, currency strategist at Societe Generale.
"Absent recession, the dominant market driver will still be US policy and cheap money," he said.
The pressure on the US may get stronger after the International Monetary Fund on Monday cut its global growth forecast and warned of a dimming outlook if European policymakers do not act forcibly and promptly to quell their region's debt crisis.
The weak US retail sales data pushed the 10-year Treasury yield down to 1.442% on Monday, matching its record low hit on June 1, while the dollar fell to a one-month low against the yen of 78.69 yen. The dollar edged up at 78.83 yen on Tuesday.
Oil retreated after gaining over $1 on Monday, with US oil down 0.3% at $88.14 a barrel.
Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 4 basis points early on Tuesday.
UNCERTAIN BAILOUT
Uncertainty over the future of the euro zone's bailout fund deepened on Monday when Germany's Constitutional Court said it would not rule until September 12 on whether the rescue fund, the European Stability Mechanism, and planned changes to the region's budget rules are compatible with German law.
The delay in mobilizing bailout funds for troubled euro zone states could risk higher borrowing costs in vulnerable economies, like Spain and Italy, beyond sustainable levels.
The euro stood at $1.2265 on Tuesday, struggling to move away from its two-year low of $1.2162 hit on Friday, and also hovered near a six-week low against the yen of 96.17 yen touched on Monday.
"We think that current levels offer an interesting re-entry point into short EUR positions, which we like expressing against the USD and JPY as well as against high carry currencies like the BRL," Barclays Capital analysts said in a research note.
Spain's borrowing costs are expected to stay high on Tuesday when it tests investor appetite for its debt for the first time since announcing more austerity last week.
The spread on Italian 10-year bonds over German Bunds neared 500 basis points on Monday, the highest since early January, on concerns about the possibility that Spain may eventually need a full bailout.
While 10-year Italian sovereign debt yield rose above 6 percent, Rome has found solid domestic demand to meet its funding needs so far.
Europe's debt crisis and slowing global growth took a toll on the performance at the biggest US public pension fund, Calpers, which had a dismal 1% gain in the last 12 months, well below its return target and its hefty 20.9% gain the year before.
