Asian shares gave up earlier gains and the euro struggled on Wednesday, as concerns over euro zone sovereign funding ahead of Spanish and Italian debt auctions later this week overrode earlier optimism about the US and Chinese economies.
Gold extended gains to edge up 0.3% even when the dollar index, measured against six key currencies, rose 0.3% as safety bids prevailed on worries over Europe.
MSCI's broadest index of Asia Pacific shares outside Japan was nearly flat, retreating on profit taking after earlier hitting its highest since December 9 amid hopes of robust US corporate earnings and monetary easing in China.
European shares were expected to open lower, with financial spreadbetters expecting Britain's FTSE 100, Germany's DAX and France's CAC-40 to fall around 0.3-0.5%.
"It's got a little bit overdone over the past couple of days, particularly in the Shanghai Composite, but the pullback today is really pretty small, so I think it is technical in terms of the market getting a little bit overbought," said Guy Stear, head of research with Societe Generale in Hong Kong.
Shanghai shares have risen about 7% since Friday's low, while Hong Kong's Hang Seng Index has climbed about 4% this week. But on Wednesday, Shanghai shares fell 0.4% and Hong Kong stocks were flat.
"You need more clarity to take on more risk, but that's still not immediately clear. People are betting on aggressive policy-easing, particularly in the mainland, but conditions are still not bad enough to warrant that," said Beijing-based CICC global equity strategist Hong Hao.
Materials sector outperform
Australian shares rose and the pan-Asian materials sector outperformed for a second day in a row on the back of Tuesday's rally in copper, oil and gold.
Japan's Nikkei average took comfort from a rise in US stocks on hopes for better US corporate earnings, but Euro zone worries limited gains at 0.2%.
Some see more resilience in Asia this year than last two years.
"Asia's lower price-to-book and less net foreign buying suggests less risk of a January correction," Credit Suisse said in a research note, referring to 2010 and 2011 when the pan-Asia index peaked in the first week of January after some early exuberance.
But overall market sentiment remains cautious about the prospects of Europe extricating itself from its deep-rooted debt problems any time soon, raising concerns that the crisis would eventually overshadow the modest improvement seen recently in US data and also dampen growth in Asia's powerhouse, China.
China's trade data released on Tuesday showed a record copper imports but also hinted at a trend for shrinking exports and imports, making an eventual policy easing plausible.
"I am not pessimistic about China, but demand hasn't exceeded beyond what is seasonally based while industrial orders are held back," said Tomomichi Akuta, senior energy researcher at Mitsubishi UFJ Research and Consulting in Tokyo.
"Manufacturing activities after the Lunar New Year holidays will be key in gauging the economic strength," he said.
Debt auctions
Asian credit markets were less optimistic on risk than equities, with spreads on the iTraxx Asia ex-Japan investment grade index barely narrowing from Tuesday's levels.
Sentiment could clearly turn for the worse depending on the Spanish and Italian debt sales given that the two big euro zone economies are seen as most at risk from the crisis.
US crude futures eased below $102 a barrel on the concerns about Europe, while London copper fell 0.6%.
The euro fell 0.3% to $1.2740, off the previous day's high of $1.2819 hit after credit rating agency Fitch said it did not expect to cut France's triple-A rating this year.
"Fitch may not cut France this year, but there is risk that other rating agencies may downgrade France, so the situation in the euro zone overall has not changed," said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo. "A risk-on sentiment can easily turn around any time."
Tanase said commodity-linked currencies -- such as the Australian dollar -- may be more resilient to "risk-off" sentiment than the euro as commodities prices were underpinned by supply and other factors.
