The U.S. economy is slowing and the Fed is not offering any more stimulus at this point -- even after the Bank of England stunned traders on Wednesday by saying it was considering more quantitative easing.
News that China's factory growth nearly stalled in June on weakening global demand was a further signal to keep trimming assets from their portfolios that are vulnerable to volatility, and perhaps also to keep gearing at a minimum, at least until the outlook for the second half was clearer.
"The key in this environment is really just low leverage," Adrian Foster, head of financial market research at Rabobank, told Reuters Television.
"We have seen sharp moves to the upside and to the downside, and then look back and see markets have been flat for a couple of months. But if you had high leverage in that period you would have been chopped out."
The Nikkei share average .N225 fell 0.3 percent, weighed down the most by technology stocks. But foreign buying of relatively inexpensive Japanese shares and strength in blue-chip stocks such as Fast Retailing (9983.T) and Honda Motor Co (7267.T) should continue to support the Tokyo equity market.
"The Fed's view was not completely surprising, therefore the Tokyo market may not fall significantly... and Tokyo shares are still undervalued," said Tsuyoshi Kawata, a senior strategist at SMBC Nikko Securities in Tokyo.
The MSCI index of Asia Pacific stocks outside Japan .MIAPJ0000PUS fell 0.7 percent, with the consumer discretionary sector, what had been practically a sure-fire bet through most of the first half, leading the decline.
The index has fallen 8.2 percent since May as of Wednesday, underperforming the 6.9 percent decline in the MSCI all-country world stocks index .MIWD00000PUS.
Chinese stocks listed in Hong Kong were down 1.2 percent on the day .HSCE, continuing to underperform the broad Hang Seng index, after HSBC's early reading of Chinese industrial activity in June came in at an 11-month low.
CROSSES OF GOLD
Gold slipped in the spot market to $1,546.69 an ounce after four consecutive sessions of gains, but was still up 8.9 percent year to date, triple the returns of the U.S. S&P 500 equities index.
Furthermore, gold denominated in other currencies has been on a tear in recent weeks. Gold in sterling terms reached a record high of 969.66 pounds, gold/Australian dollar climbed to the highest in a year at AU$1,474.37.
Gold denominated in the Australian dollar could be poised for a volatile breakout to as higher as AU$1,950 in the new few months.
The euro traded around $1.4300, near the middle of a trading range carved out over the past month. The looming risk of a debt default by Greece shifted back to the forefront of investors' minds, particularly after Federal Reserve Chairman Ben Bernanke said the fate of the indebted country could threaten the global financial system.
The euro fell to a session low of $1.4287, down 0.3 percent on the day. The single currency would probably have to slide below a low for the month around $1.4070 before traders would pounce on the move.
With the dollar slowly climbing out of a downtrend, such a move was not improbable.
"Investors are buying back the dollar for now, and there even may be some who are going long, but yields on U.S. Treasuries would have to rise to help it break the downward trendline off the 2010 highs," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.
The European Union Council meets later for a two-day meeting. Though Greece is not formally on the agenda, markets will be looking for assurances from European that they have a workable plan to help Athens avoid a debt default and return to financial stability.
U.S. oil futures fell 1.3 percent to $94.20 a barrel, dragged down by continued flows into the dollar. Crude prices have dropped 17 percent since May as economists ratchet down growth forecasts for the world's biggest energy consumers.
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