Asian stocks fell for a third straight session on Tuesday as a continued retreat in oil prices below $40 a barrel hit resource-related shares, while auto makers slumped after Toyota's bleak assessment of the near-term future.
The uncertain economic outlook continues to bolster low-yielding but safer government bonds, as evidenced by the record $38 billion of two-year notes sold by the U.S. government on Monday for a historic low yield of below 1 percent.
European shares were also set to fall as worries over the global economy remain. Up next on the global data front is the final U.S. gross domestic product figure for the third quarter, with the wait pressuring the dollar in Asian trade.
Shanghai's main index fell almost 5 percent after China's central bank on Monday trimmed interest rates by 27 basis points, in a move that disappointed investors because it was smaller than more aggressive actions by other central banks.
Last week the Federal Reserve and Bank of Japan slashed rates to virtually zero in the world's two largest economies and launched more asset-buying plans to ward off a deeper recession.
"I believe the optimism that we had over the last month has pretty rapidly come to an conclusion," said Tim Rocks, an equity strategist for Macquarie Securities in Hong Kong.
"The macro data is just truly awful, the Japanese export data yesterday was the most frightening thing that I have seen for a long, long time. The economic data just shouldn't behave like this."
On Monday, figured showed Japanese exports plunging at the fastest annual pace on record in November.
The MSCI index of Asia-Pacific stocks outside Japan dropped 3 percent. Though the index is now well off a five-year low hit in November, it remains down 54 percent for the year in the worst yearly slide in its 20-year history,
Trading was limited, with Japanese financial markets closed for a national holiday and many market players away from their desks before Christmas and other year-end holidays.
It has been a tough 2008 that has featured the collapse of Bear Stearns and Lehman Brothers, as well as an unprecedented wave of rate-cutting, stimulus measures and government support for the ailing financial sectors.
There is no shortage of poor economic data, and that is further denting investor confidence. New Zealand's economy contracted by the biggest amount in eight years in the third quarter, reinforcing the case for more central bank rate cuts, data on Tuesday showed.
Asian shares tumbled, with auto makers such as South Korea's Hyundai Motor slumping 10 percent a day after Toyota Motor Corp on Monday forecast its first-ever annual operating loss in the year until end-March.
Resource-related stocks such as BHP Billiton also fell on worries that a deep global downturn will hit demand for commodities.
Shares in South Korea, Hong Kong, Taiwan and India fell between 2-3 percent.
Australian shares ended the day 0.7 percent lower.
OIL BELOW $40
Oil prices extended their recent sharp falls, falling 51 cents to $39.40 a barrel as investors worry that production cuts from oil cartel OPEC could take a while to come through.
The United States is expected to confirm later in the day that the world's largest economy contracted 0.5 percent in the third quarter, matching an earlier advance estimate.
Caution ahead of the data hit the U.S. dollar, which has lost the momentum it enjoyed earlier in the year in a combination of increased risk appetite for foreign assets, near-zero U.S. interest rates and the liquidation of assets before year-end.
The euro edged up 0.3 percent to $1.3985, and also rose against the Japanese yen, up 0.3 percent to 126.22 yen.
The dollar index, a gauge of the U.S. currency's performance against six major currencies, edged down 0.1 percent to 81.080.
However, most Asian currencies fell against the dollar, tracking the slump in regional shares.
Economists at Goldman Sachs warned that the United States would need ongoing fiscal support because the usual economic recovery drivers since World War Two — such as strong homebuilding, consumer spending on durable goods and corporate inventory restocking — will be missing in action.
"The U.S. economy needs not only a large package of fiscal stimulus in 2009, but one that provides substantial support beyond next year," they said in a note to clients.
Given all the uncertainty, investors are still opting for government bonds.
U.S. Treasuries were little changed in Asia trade due to the holiday in Japan, where many bond dealers base their regional operations.
That comes a day after investors were willing to buy new two-year notes despite the low yield, in an indication that the safe-haven scramble for U.S. Treasuries continues unabated.
