Asian Shares On Defensive After Sharp Drop In China

By Hideyuki Sano

TOKYO (Reuters) -- Asian shares were on the defensive on Thursday after a sharp fall in mainland Chinese shares rekindled worries about the health of China's economy while investors awaited word from the European Central Bank on its plans regarding additional stimulus.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.3 percent in early trade while Japan's Nikkei dropped 0.5 percent.

Wall Street stocks also lost momentum, with the S&P 500 losing 0.6 percent despite earlier gains, failing to extend a rally since late last month beyond its 100-day moving average.

"I think the rebound in markets is coming to an end. From now, markets will be looking to policy events later this month as well as corporate earnings," said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

The recovery in many share markets since last month has in fact been partly supported by hopes policymakers around the world may take steps to bolster their respective economies.

One such hope may be fulfilled in an event-packed period toward the end of month, starting with the European Central Bank holding its policy meeting later in the day.

ECB President Mario Draghi is widely expected to keep the door open for more monetary stimulus in the face of deflation risks, but is seen stopping short of taking new policy steps at Thursday's meeting.

The ECB meeting will be followed by central bank policy meetings in the U.S. and Japan, as well as four-day leadership meeting of China's Communist party, all planned for next week.

The Shanghai Composite stock index slumped 3 percent on Wednesday, its worst daily performance in five weeks after a relatively calm month, reminding investors that China's markets and economy are still far from stable.

That put fresh pressure on commodity-linked currencies and emerging market currencies.

Emerging market currencies from the Malaysian ringgit to the Chilean peso stepped back from recent highs.

Among major currencies, the Australian dollar tumbled to $0.7202 on Wednesday, its lowest in a week. The Canadian dollar fell to C$1.3149 per U.S. dollar on Thursday, its lowest in 2 1/2 weeks, as the Canadian central bank lowered its growth forecasts for 2016 and 2017.

The euro stood at $1.1342, barely moving this week ahead of the ECB's meeting. The yen was little changed at 119.88 to the dollar.

Oil prices fell to three-week lows as the U.S. government reported a bigger than expected build-up in crude oil stockpiles.

Brent futures dropped to a three-week low of $47.50 per barrel on Wednesday and last stood at $48.01.

U.S. crude futures fell to $44.86 a barrel, the lowest since Oct 2.

U.S. natural gas futures fell to a three-year low on Wednesday on forecasts for warmer weather over the next two weeks.

(Reporting by Hideyuki Sano; Editing by Eric Meijer)