TOKYO (Reuters) - Asian shares fell on Wednesday on worries that the global economic slowdown will erode corporate earnings, with the market unconvinced the euro zone can decisively bring down struggling member states' borrowing costs even after yields pulled back.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1 percent, after slipping to a new low for the month in the wake of a four-day losing streak in U.S. stocks. Japan's Nikkei average shed 0.4 percent.
"There is a sore lack of momentum in the market," said Chung Seung-jae, an analyst at Mirae Asset Securities, citing a 0.4 percent drop in the Korean equities market.
"In addition to pressure stemming from global growth worries, we have disappointing corporate earnings."
European equities rose, however, and Spanish and Italian debt yields eased on Tuesday on the notion that Europe was moving towards putting its rescue fund into action and as euro zone finance ministers agreed to give the first batch of aid to Spain's troubled banks by the end of July.
Traders were far less upbeat about the euro, which last traded at $1.2266, pinned near a two-year low of $1.2225 hit in early Monday Asian trade.
The latest source of uncertainty for the currency was a hearing by the German Constitutional Court into whether the euro zone's bailout fund, known as the European Stability Mechanism, and planned changes to the region's budget rules are compatible with German law.
The ESM is a crucial tool in helping to bring down borrowing costs of indebted nations and breaking the link between the sovereign debt problem and the banking sector stress in Europe.
"Investors have grown sceptical about the decision-making process in Europe and this has hurt euro sentiment," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
The euro zone's three-year debt crisis, which began with its peripheral members, has engulfed the region's larger economies Spain and Italy. Rome said on Tuesday that it may want to tap euro zone aid to ease its borrowing costs as euro zone finance ministers struggled to soothe market jitters.
JGBS DRAW INTEREST
With risk aversion deeply rooted in the markets, investors were pouring money into safer assets such as bonds issued by sturdier euro zone economies, including the Netherlands and France, as well as by Japan and international organisations, said a portfolio manager at a Japanese insurance company.
"Money, seeking places to park, is finding its way into sovereign debt, especially Japanese government bonds," he said.
"JGBs are not cheap in absolute terms but still look valuable relative to U.S. Treasuries or German Bunds, given Japan's low inflation rate," he said, adding that the European Central Bank's cut in the deposit rate to zero could prompt euro zone banks to shift into safe haven bonds part of the 800 billion euros they have parked at the ECB overnight.
Some money market traders have also said a probe into an interest rate-fixing scandal for Libor, or London interbank offered rate, could affect Tibor, the Tokyo interbank lending rate, which has traditionally been set high.
An easier interbank lending rate would push down rates on loans and provide incentives for banks to put their money to work in higher-yielding bonds, traders said.
The yield of 30-year JGBs slid to 1.820 percent, its lowest since June 12, while the 20-year bond yield fell to 1.605 percent, matching a five-week low hit on Tuesday.
Commodities and oil, which have recently been hurt by weak data from the United States and China, the world's biggest and second-biggest economies, regained their footing on Wednesday after sharp drops in the previous session.
China's benign inflation and weak imports pointed to softening domestic demand as well as uncertainties over the external economic downturn, keeping intact expectations that its second-quarter gross domestic product report due on Friday will show the slowest growth in at least three years.
Brent crude rose 0.5 percent to $98.47 a barrel and U.S. crude added 0.6 percent to $84.39 a barrel.
Spot gold gained 0.4 percent to $1,574.49 an ounce but stayed firmly capped below $1,600, after posting its biggest one-day decline since late June on Tuesday as investors liquidated assets across the markets.
Gold holdings in the world's eight major exchange-traded products fell by the largest one-day amount since late May, shrinking by 116,427 ounces by the close on Monday to 70.529 million ounces, reflecting some of the investor wariness towards bullion.
Falling Spanish yields helped to improve sentiment in Asian credit markets, where the spread on the iTraxx Asia ex-Japan investment-grade index was 5 basis points narrower.
(Additional reporting by Lisa Twaronite in Tokyo and Joonhee Yu in Seoul; Editing by Edmund Klamann)
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