TOKYO - Asian stocks sagged on Tuesday amid profit taking in Hong Kong and Chinese markets, while Tokyo shares rebounded on expectations that Japan will opt for a snap election that may lead to fresh stimulus measures.
Spreadbetters saw a slightly higher start for Europe in the wake of Japan's rebound, forecasting Britain's FTSE, Germany's DAX and France's CAC to open about 0.1 per cent higher.
MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.3 per cent.
Hong Kong and Chinese shares fell for a second straight day after the debut of the landmark Hong Kong-Shanghai trading link as investors continued to lock in profits in stocks that had risen sharply ahead of the launch. Downbeat Chinese home prices data also dampened sentiment.
Hong Kong's Hang Seng shed 0.9 per cent and the Shanghai Composite Index lost 0.7 per cent.
Tokyo's Nikkei, in contrast, rose sharply as the market waited to see if Prime Minister Shinzo Abe will call a snap election, delay a sales tax increase that had been planned for October next year, and consider further economic stimulus.
The Nikkei gained 2.2 per cent, erasing much of Monday's 3 per cent fall suffered when shock data showed Japan had slipped into recession.
If he does call an election, Abe will hope his ruling Liberal Democrat Party (LDP) will trounce a weak opposition to reaffirm its mandate to pursue reflationary economic policies.
"While there has been some decline in the support rate for Abe's cabinet there has been no accompanying rise in the support for the opposition from the depressed level. We would therefore expect the main ruling LDP to maintain its majority and for Abenomics to continue," said Miyuki Kashima, managing director at BNY Mellon Asset Management. "As a result, our positive view on the (Tokyo share) market remains unchanged."
Investors sold the euro on prospects of further easing by the European Central Bank, preferring to hold dollars as the US Federal Reserve is expected to raise rates next year.
ECB President Mario Draghi said the central bank was ready to provide further stimulus if its current efforts are not sufficient to accelerate the region's recovery, adding such new measures could include purchases of sovereign bonds.
The euro was down 0.2 per cent at $1.2473, pulling further away from a 2 1/2-week high of $1.2580 hit the previous day.
The dollar traded little changed at 116.605 yen, near a seven-year high of 117.06 struck in the wake of Monday's shocking GDP data.
The Australian dollar rained on expectations that it will benefit from investors turning away from the euro zone and Japan in search of higher yields. The Aussie rose 0.1 per cent to $0.8719 .
"I see a risk for the AUD/USD to be squeezed higher because of capital flows into Australia," said Greg Gibbs, a strategist at Royal Bank of Scotland in Singapore.Gold lost momentum on the dollar's strength, trading at $1,188.20, off a 2 1/2-week high of $1,193.95 hit on Monday.
Oil prices sagged as recession in Japan, the world's fourth largest crude importer, added to oversupply worries. But prices managed to hover above four-year lows as Russia and Venezuela appeared to be coordinating a price defence plan.
US crude futures were down 44 cents at $75.20 per barrel but off Friday's four-year low of $73.25.