Asian stocks hit 17 month low on Tuesday

Asian shares hit 17-month lows on Tuesday as investors fretted about everything from the Chinese economy, to trade wars, higher U.S. bond yields and political dysfunction in Europe.

"Risk sentiment is in a foul mood and stocks are sinking everywhere," said analysts at JPMorgan in a note. "The reasons are myriad and many are a continuation of recent overhangs."

MSCI's broadest index of Asia-Pacific shares outside Japan eased another 0.15 per cent after ending Monday at its lowest point since May last year.

Japan's Nikkei fell 1.1 per cent as it resumed from a one-day holiday, hurt in part by a rise in the safe-harbour yen.

Eyes were again on China, where blue chips shed 4.3 per cent on Monday in the largest daily drop since early 2016. While the stock market in China is far from a reliable gauge of economic activity, sharp falls do spill over into sentiment across the region.

"The latest round of selling in China can't be dismissed and has resulted in Chinese stocks suffering their worst start to October in a decade," said Jameel Ahmad, global head of currency strategy & market research at broker FXTM.

"We have seen a trend in the past where weakness in China has resonated on other global markets," he added. "If the yuan continues to ease, it does paint a picture of more possible pain for emerging markets."

The yuan had slid to its lowest official close against the dollar in seven weeks on expectations Beijing would follow Sunday's policy easing with more stimulus.

On Monday, a senior U.S. Treasury official expressed concern at the fall in the yuan, adding that it was unclear whether Treasury Secretary Steven Mnuchin would meet with any Chinese officials this week.

On Wall Street, the tech-heavy Nasdaq fell for the third straight day and growth stocks were pressured by worries rising bond yields might ultimately hobble the economy.

The S&P 500 lost 0.04 per cent and the Nasdaq Composite 0.67 per cent, while the Dow rose 0.15 per cent as defensive stocks found buyers.

NO SAFETY NET

Yields on 10-year Treasury paper held at 3.23 per cent on Tuesday, just off a seven-year top.

Treasuries have had a sort of safety net up to now as rising yields tend to dampen stocks and threaten the economic outlook, thus putting pressure on the Federal Reserve to go slow on policy tightening.

Yet recently the Fed has sounded so bullish on the economy and so hawkish on rates that the net has become frayed.

"The size and speed of the bearish bond impulse would suggest a collective shift in market thinking about the US growth prospects and policy projections," said Damien McColough, Westpac's head of rates strategy.

"The Fed's expected 2019 profile has moved from just below 2 hikes to 2.5 hikes being factored-in."

That shift has underpinned the dollar against a basket of currencies where it firmed to 95.757, from a low of 93.814 just a couple of weeks ago.

The dollar had less luck on the safe-haven yen pulling back to 113.09 from a 114.54 peak last week.

The euro was undermined by political troubles in Italy and lapsed to $1.1491, well off September's $1.1815 top.

Italy's borrowing costs have surged as a war of words between Rome and the European Union over the country's budget plans escalated.

The yield on Italian government 10-year bonds rose more than 20 basis points to 3.626 per cent, the highest since February 2014, while Italy's FTSE MIB stock index fell to its weakest since April 2017.

Brazil's real currency hit a two-month high and stocks jumped after market-preferred presidential candidate Jair Bolsonaro's strong first-round win on Sunday.

In commodity markets, gold failed to get much safety bid at $1,190.41, having fallen 1.4 per cent overnight.

Oil prices were little changed in early trade, with U.S. crude off 3 cents at $74.26.

(Editing by Shri Navaratnam)

(With inputs from agencies.)