Asian shares and the euro fell on Monday as a surge in Spanish government bond yields renewed concerns about Europe's sovereign debt crisis and undermined investor appetite for riskier assets.
China's yuan weakened after the central bank doubled the size of the currency's trading band over the weekend, a crucial reform in the process of liberalising the country's nascent financial markets.
A firmer dollar on the back of the euro zone's woes, and worries about slowing demand from China, also weighed on a broad range of commodities from precious metals and copper to oil.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.8%, dragged lower by the materials sector, which underperformed other sub-indexes with the broad drop in commodities prices. Japan's Nikkei average shed as much as 1.6%.
"Europe will be the focal point for the market this week, especially the results of Spanish bond auctions that may provide clues on how deep this latest crisis is running," said Choi Chang-ho, an analyst at Shinhan Investment & Securities.
With European problems making investors nervous, the region's equities likely start trading lower, with financial spreadbetters predicting major European markets would open down as much as 0.7%. U.S. stock futures were down 0.2%.
Spain's government bond yields jumped on Friday and the cost of insuring its debt against default hit an all-time peak as record borrowing by its banks from the European Central Bank highlighted fears about the country's finances.
RISK AVERSION
The euro slipped 0.4% to $1.3019, after hitting a one-month low of $1.3009 on Monday. The dollar index, measured against major currencies, rose 0.3%.
The dollar's strength pushed precious metals lower, with spot gold down 0.8% to $1,646 an ounce, extending Friday's 1% loss, while spot platinum slid more than 2% to $1,559 an ounce, its lowest since Jan. 25.
Industrial commodities also took a beating, with Brent crude oil shedding more than a dollar to a low of $119.80 a barrel, and Shanghai copper falling more than 2% to a three-month low of 56,700 yuan ($9,000) per tonne. That in turn saw selling in commodity-linked currencies such as the Australian dollar, which fell 0.5^ to $1.0313.
CHINA WORRY OVERDONE?
Investor sentiment has also been hurt by worries about slackening demand from China, the world's second largest economy, after data showing a slowdown in private domestic demand, retail sales and fixed asset investment and a sharp drop in property and home sales, which weigh on construction demand.
But most analysts say the data remains consistent with a "soft landing" scenario for the Chinese economy.
China's move on Saturday to double the size of the yuan's trading band against the dollar was also seen by investors as a strong signal that Beijing is comfortable with economic growth and believes it has avoided a hard landing.
On the first trading day since the move the yuan opened sharply weaker than the mid-point fixing – the base rate that the central bank uses to flag the government's intentions for its value – but even at its weakest point remained within the boundaries of the old trading band.
The currency fell as far as 6.3250 per dollar – 0.5% weaker than the midpoint and 0.3% weaker than Friday's close – but pared back much of its early losses to stand around 6.3139, down 109 pips, or 0.17% from Friday's close.
