Asia stocks snap back into the red on simmering N.Korea tensions

By Shinichi Saoshiro

TOKYO (Reuters) - Asian stocks turned lower on Thursday as investors fretted about the simmering tensions between the United States and North Korea, sending Seoul shares skidding to two-month lows even as the previous day's rush into safe-haven assets appeared to slow.

Spreadbetters expected European stocks to follow suit, forecasting Britain's FTSE (FTSE) to open down 0.6 percent and Germany's DAX (GDAXI) and France's CAC (FCHI) to start a shade lower.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) slipped 1 percent, snapping a brief foray into positive territory early in the day and extended losses from Wednesday.

Japan's Nikkei (N225) also handed back earlier gains to shed 0.1 percent.

Shanghai (SSEC) fell 1.1 percent and Hong Kong's Hang Seng (HSI) lost 1.6 percent. South Korea's KOSPI (KS11) dropped as much as 1.2 percent to a two-month low to move further away from record highs set at the end of July.

"Some investors had wanted reasons to unwind their long positions built up in emerging market equities, and they found an opportunity in the latest bout of Korean tensions," said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.

"At the moment, it is unclear how the Korean situation will play out and that is hampering the markets. But as past incidents involving the Korean Peninsula have shown, the impact on financial markets tends to fade away over a span of few days."

The declines in some Asian bourses, like Japan's Nikkei, were limited after Wall Street shares closed barely lower overnight, trimming losses, as investors appeared to brush off geopolitical concerns. (N)

The flight-to-safety into U.S. Treasuries also abated overnight. The 10-year Treasury note yield (US10YT=RR) initially fell to a six-week low of 2.212 percent as bond prices rose, but climbed back to 2.248 percent.

"U.S. equities managed to cut its losses towards yesterday's close and while the VIX (volatility index) did pop higher, it still remains at an overall low level. Furthermore, the benchmark Treasury yield also climbed away from lows," said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

"These developments suggest that risk aversion caused by geopolitical tensions in North Asia are temporary in nature, as long as it does not involve military conflict."

Bids into the Japanese yen and Swiss franc, currencies that find demand in times of geopolitical anxiety, also tapered.

The dollar was steady at 110.030 yen after going as low as 109.560 overnight, its weakest in eight weeks.

The Swiss currency slipped 0.2 percent against the dollar to 0.9655 franc after surging more than 1 percent the previous day.

The euro inched down 0.2 percent to $1.1737 while the dollar index against a basket of major currencies added 0.1 percent to 93.662 (DXY).

Currency markets focused on the U.S. producer price index data due later in the session. Investors will study the numbers to get a feel for the U.S. inflation trend and any impact the data could have on the Federal Reserve's monetary policy.

The New Zealand dollar slipped to a near one-month low of $0.7300 after Reserve Bank of New Zealand Governor Graeme Wheeler said he would like to see the local dollar fall and noted the central bank had the capability to intervene.

The RBNZ had held rates at a record low of 1.75 percent on Thursday and reiterated that policy would stay loose for a considerable time to come.

In commodities, crude oil lost momentum after rising overnight on data pointing to declining U.S. inventories. [O/R]

Brent crude (LCOc1) was flat at $52.70 a barrel.

Gold prices were nudged away from recent highs as broader risk aversion receded somewhat. Spot gold was 0.1 percent lower at $1,276.40 an ounce after having spiked the previous day to a near two-month peak of $1,278.66.

(This story corrects error in Brent price in 20th paragraph.)