Chinese Factories Shrink More Than Expected, Stocks Extend Losses

© Reuters/David Gray. A coal-burning power plant can be seen behind a factory in the city of Baotou, in China's Inner Mongolia Autonomous Region on Oct. 31, 2010.

By Reuters -

HONG KONG (Reuters) - Asian stocks fell on Wednesday as fears of an entrenched global economic slowdown gripped investors, underlined by a weak factory survey from China, while the greenback firmed as investors fled to relatively safe-haven assets.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 2 percent, with Australia down 1.8 percent and South Korea falling 1 percent. S&P mini futures fell 1 percent after the weak China PMI.

"The industrial sector in China remains a concern indicating that the economy is not out of the woods yet while the Fed's comments last week indicate a glass half-empty view of the global economy," said Tai Hui, chief Asia market strategist at JP Morgan Asset Management in Hong Kong.

More evidence of an entrenched slowdown was evident as activity in China's factory sector shrank at a faster pace than expected in September, falling to its weakest level in 6-1/2 years as domestic and export demand continued to slump, a private survey showed.

China's stock markets took the weak data on the chin with main indices down between 2-3 percent in opening trades. Japanese markets are shut through Wednesday.

Fresh cracks in the commodities complex, amplified by drops in copper, raised concerns that a China-led slowdown may pose significant headwinds for riskier assets, particularly global equities. On Tuesday, the Asian Development Bank lowered its growth forecast for China to 6.8 percent for 2015.

Overnight on Wall Street, the Dow Jones industrial average fell 1.09 percent, the S&P 500 lost 1.23 percent, and the Nasdaq Composite fell 1.5 percent to 4,756.72.

Losses in equities prompted investors to plough funds into fixed income assets. The benchmark two-year U.S. Treasury yield fell to 0.67 percent, nearing a two-week low.

The spread between the 10-year bond and the 2-year bond has narrowed to 146 basis points from 176 basis points in early July, indicating markets were expecting sub-par economic growth.

Risk aversion was particularly evident in the currency complex with the relatively higher-yielding Australian dollar wallowing at more than one-week lows.

In currencies, the U.S. dollar consolidated most of its overnight gains in early Asian trade. It held firm at 96.439 against a basket of six currencies, after earlier rising 1 percent. The Japanese yen held firm against the dollar at 120.24 as investors shied away from adding risky bets.

U.S. crude futures rose 0.5 percent to $46.57 per barrel, while Brent futures were 0.3 percent firmer at $49.22.

In its biggest one-day drop in more than two months, copper sank to three-week lows as fund and speculative selling pushed prices through sell stops, accelerating the pace of declines.

A 19-commodity Thomson Reuters/CoreCommodity CRB Excess Return languishing at two-week lows.

Broader risk aversion failed to lift demand for precious metals with both spot gold and silver nursing big overnight losses.