Asian shares eased on Thursday as markets were vulnerable to faltering factory orders in China and lack of concrete measures shown by European leaders to tackle the risk of Greece leaving the currency bloc.
European Union leaders, at an informal meeting on Wednesday, said they wanted Greece to stay in the euro zone while respecting commitments it had made in return for its bailout, but have been advised by senior officials to prepare contingency plans in case Greece exits.
The murky outlook for the euro zone and fears that the crisis could derail the global economy have prompted investors to park money in safe-haven assets such as U.S. and German government bonds, the U.S. dollar or cash.
Implications of a retreat in China's HSBC Flash Purchasing Managers Index, the earliest indicator of the country's industrial activity, gradually sank into market players' minds as the data reflected persistent weakness in the world's second-largest economy despite policymakers aiming to shore up growth.
The PMI fell to 48.7 in May from 49.3 in April as export orders fell to two month lows, marking the seventh straight month that the index has been below 50, signalling that the sluggish economic conditions are set to continue throughout the first half of the year.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.4% early, then slid to be down 0.4% before recovering to be off 0.1%. Shares in Australia, which are heavily reliant on demand for commodities from China, fell 0.2%. Japan's Nikkei stock average, which was down at one point, later was up 0.2%.
Despite the China news, European shares looked likely to take cue from a late recovery in Wall Street, with spreadbetters predicting major European markets would open as much as 1% higher. U.S. stock futures were down 0.1%.
In Europe, that region's manufacturing PMI figures due later in the session will likely be the focus.
Weak data could accelerate selling in the single currency as it would highlight the damage to economic fundamentals from Europe's failure to fix its debt refinancing and banking instability.
The dollar index on Thursday eased from its highest since September 2010 of 82.221 reached the previous session.
Ashraf Laidi, chief global strategist at City Index, said the index could climb towards 90 later this year, citing potential catalysts such as mismanagement of a Greece exit from the euro zone, or if Athens and its global lenders remained deadlocked.
U.S. 10-year yields fell to 1.73% on Wednesday, nearing 1.67% set in September, which was the lowest in at least 60 years.
Strong bids resulted in Germany selling its first-ever zero-coupon two-year bonds on Wednesday.
The euro was down 0.1% at $1.2575, just above its lowest level since July 2010 of $1.25453 hit the previous day.
The yen was stuck against the dollar at around 79.50 yen while not far from its highest in more than three months of 99.531 yen against the euro hit on Wednesday.
EUROPE DIVIDED
Analysts said that with European leaders at odds over specific proposals to prevent a contagion from political turmoil in Greece and to stabilise fragile banking systems, it was hard to build positions in risk assets.
"Therefore we prefer to stay in 'risk off' mode," said Barclays Capital analysts in a research note.
Gold, which can also be perceived as a safe-haven in times of turmoil, has been moving more in sync with the weak euro. Spot gold was down 0.4% at $1,555.66 an ounce.
Europe also faces the need to stem the fallout from a winding up or restructuring of bad banks.
Spain announced a 9-billion-euro ($11.3 billion) bailout for troubled lender Bankia, its fourth-largest, on Wednesday, while also seeking ways to help its highly indebted regions meet huge refinancing needs.
U.S. crude futures recovered 0.4% to $90.26 a barrel on Thursday, while Brent was up 0.3% at $105.88 a barrel.
