Asia stocks falter as weakness in China markets dim mood

Tokyo (Reuters): Asian shares eased on Monday, with investor sentiment hurt by a retreat on Wall Street and sliding Chinese stocks, while the euro skidded after German coalition talks hit an impasse.

MSCI’s broadest index of Asia-Pacific shares outside Japan extended losses and was down 0.2%.

Australian shares were down 0.1%, while Japan’s Nikkei stock average was 0.6% lower.

China stocks fell sharply after Beijing set sweeping new guidelines to regulate asset management products. Analysts said that could dampen investor appetite for riskier assets.

The Shanghai Composite index .SSEC was down 0.8%, while China’s blue-chip CSI300 Index fell 0.7%.

“The new guideline is not the last shoe to drop, or the last piece of bad news,” said Li Huiyong, an economist at Shenwan Hongyuan Securities. “The era of tough financial supervision has just begun.”

On Friday, the Dow Jones Industrial Average shed 0.4%, the S&P 500 lost 0.3% and the Nasdaq Composite was down 0.2%.

The U.S. House of Representatives on Thursday passed their version of a tax overhaul bill that would cut corporate taxes, but the Senate continued to wrangle over its rival tax bill, with investors uncertain about whether Congress will be able to reach a compromise.

Against the yen, the dollar was nearly flat at 112.01, after earlier falling as low as 111.89, its lowest since Oct. 16.

The dollar index, which tracks the greenback against a basket of six rival currencies, added 0.3% to 93.955 .DXY, as the euro fell 0.5% to $1.1737 EUR=.

Talks among four German parties seeking to form a coalition government following an election that weakened Chancellor Angela Merkel broke down on Sunday after the pro-business Free Democrats (FDP) pulled out, citing irreconcilable differences.

The decision by the FDP means that Merkel will either seek to form a minority government with the Greens or a new election will be held.

“It’s not a total surprise, and this kind of political change will not derail the German economy,” said Masafumi Yamamoto, chief currency strategist for Mizuho Securities in Tokyo. “We are seeing this kind of reaction in the Asian session, but we need to see how Europe will react to this news later.”

He noted that emerging currencies, which are “usually the biggest victims of risk aversion, are not really falling.”

On Monday, the Thai baht rose to its highest in more than 2-1/2 years.

Position unwinding ahead of this week’s Thanksgiving holiday could keep the dollar’s gains in check, market participants said.

With the market nearly fully pricing in an interest rate increase by the U.S. Federal Reserve next month, speculators cut their bearish bets on the dollar for the seventh straight week. The net negative value of positions against the greenback fell to a four-month low in the latest week, according to calculations by Reuters of data released by the Commodity Futures Trading Commission (CFTC) on Friday.

Lower benchmark U.S. Treasury yields also restrained the dollar, as the yield curve continued to flatten. The 10-year Treasury yield stood at 2.325% in Asian trade, down from its U.S. close of 2.354% on Friday.

Yields briefly rose on Friday, with those on 2-year notes hitting a fresh nine-year peak, after U.S. housing starts surged 13.7% to their highest since October 2016.

Spot gold was down 0.2% at $1,291.40 an ounce, after it jumped to a one-month high on Friday as the dollar softened amid tax reform uncertainty.