Asian shares and the euro eased on Thursday as concerns about the ability of euro zone countries to refinance their huge public debt dampened investors' appetite for risk ahead of a French bond auction later in the day.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2%, off its highest in nearly a month touched on Wednesday, dragged lower by Australian shares. Firm banks boosted China shares and supported Hong Kong stocks.
Japan's Nikkei slipped from Wednesday's three-week high to trade down 0.8%.
European markets will likely rise, with financial spreadbetters expecting London's FTSE to start up as much as 0.2% and Frankfurt's DAX and Paris' CAC-40 to open around 0.1% higher.
The euro eased 0.2% to around $1.2920 on Thursday, nearing a 2011 low of around $1.2856 hit on December 29. A break below that would take it back to levels not seen since September 2010. The euro stayed below 100 yen, not far above 98.71 yen hit on Monday, its lowest since late 2000.
"Euro zone debt worries persist and the euro is basically on a declining trend, while undergoing short-term swings depending on the degree of risks," said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch in Tokyo.
France plans to raise up to 8 billion euros in long-term debt on Thursday, following Wednesday's subdued 10-year German Bunds auction, which nevertheless marked a sharp improvement from November, when the debt offering could have failed without purchases from the European Central Bank.
A litmus test for investor confidence is next week's debt sales by Spain and Italy, the two big economies seen as most at risk from the crisis that has already dragged down Greece, Ireland and Portugal.
"The French bond sale is probably not as big a risk but Italy is a different story," said Fujii.
Funding concerns were highlighted on Wednesday, when Italy's UniCredit SpA launched a 7.5 billion euro rights issue at a huge discount, reflecting the difficulty some European lenders are facing to raise capital to repair their weakened balance sheet.
As investors also focused on economic data, U.S. stocks fared better than European peers on Wednesday after new US factory goods orders rose solidly in November while business capital spending cooled.
"Europe still lacks a credible mechanism to rekindle growth, and without growth the crisis can only intensify," said Russell Jones, analyst at Westpac Bank.
Asia bond market
Asian credit markets eased a tad, with spreads on the iTraxx Asia ex-Japan investment grade index widening by 2 basis points.
Issuance activity is picking up, however, with the Philippines becoming Asia's first issuer of foreign-currency sovereign bonds, saying on Thursday it raised $1.5 billion from the sale of 2037 global bonds. A quarter each were sold to investors from the Philippines and the rest of Asia, with the United States taking over a third and Europe, 15%.
The Export-Import Bank of Korea, which raised $2.25 billion in global bonds also early on Thursday, aims to raise $11 billion mostly in bonds abroad this year by exploring non-dollar markets, up from $10.3 billion it raised last year.
"The acute problem that the European area is having at the moment is causing investors to look to diversify their risk," said Kenneth Akintewe, Singapore-based portfolio manager at Aberdeen Asset Management, who helps manage Asian fixed income.
The Asian bond market may be supported by appetite from the region's big institutional players as well as a favourable macro backdrop, with policymakers generally shifting gear to pro-growth from an anti-inflationary stance, he said.
The currency risk is key, as hedging costs rise with higher volatility, and while volatility is here to stay, market players may have adjusted somewhat from the past year's turbulence.
"The market is now aware of what kind of risk factors they have to contend with, which provides a little bit of a buffer in terms of the degree of the sell-off we can anticipate now," said Akintewe.
"We need to actually see things that are even worse than last year taking place to see the market sell-off to the same degree as seen in the past several months."
European shares and the euro may be weighed further by geopolitical risk as tension escalates between Iran and the West, which is forging a concerted campain to hold back Tehran's nuclear programme.
