TOKYO Asian shares dipped to near three-week lows while safe haven assets such as U.S. bonds and the yen were in demand on Wednesday on growing anxiety Britain will choose to leave the European Union next week.
Mainland Chinese shares, among Asia's worst performers this year, could also come under pressure after U.S. index provider MSCI did not add domestic Chinese equities to its global emerging markets benchmark index, despite expectations it would.
"There will be some disappointment over the MSCI decision at a time when China's economic fundamentals are not conducive to rallies in share prices," Shingo Ito, senior economist at Mizuho Research Institute.
"Although there is some good news such as an easing in the fall in producer prices private firms' investment is softening," he added.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2 percent while Japan's Nikkei dropped 0.5 percent.
New York-traded iShares China Large Cap ETF fell 0.7 percent in after-hour trade.
On Wall Street, S&P 500 Index hit a three-week low to end at 2,075.32 on Tuesday, down 0.18 percent, in its fourth consecutive drop, led by a 1.45 percent fall in financial shares.
European shares were under more pressure, with Britain's FTSE falling 2.0 percent to a 3 1/2-month low on fears disruptions from leaving the political and economic union could harm the UK economy, possibly sending it into a recession.
"The economic impact would occur over months and years, not immediately. But financial markets are constantly trying to look forward and discount what's going to happen," said Michael Metcalfe, head of global macro strategy at State Street Global Markets based in London.
"But I think the real question will become political - that a large country has decided to leave the EU," he added.
Worries that Brexit will deal a significant blow to the integration of Europe have helped to push up borrowing costs of European countries with weak credit ratings.
The gap between 10-year Portuguese bond yields and German peers rose to 337 basis points, its widest since February. The spread for Italian and Spanish debt also rose to levels not seen since February.
Investors instead flocked to the safety of German bunds, whose yield fell below zero for the first time in history on Tuesday.
The Japanese yen also held firm, staying near a six-week high against the dollar and a 3 1/2-year high against the euro.
The yen changed hands at 106.04 to the dollar, having hit a six-week high of 105.63 on Tuesday. The euro stood at 118.85 yen after having fallen to a low of 118.51.
The safe-haven Swiss franc also rose to a 5 1/2-month high of 1.0794 per euro.
The British pound struggled near its two-month low against the dollar touched on Tuesday. It last stood at $1.4113, just above Tuesday's low of $1.4091.
Concerns about Brexit dwarfed any optimism from solid U.S. retail sales data published on Tuesday.
Fed funds futures
The 10-year U.S. debt yield fell to a four-month low of 1.567 percent on Tuesday and last stood at 1.614 percent.
Elsewhere, the offshore yuan traded at 6.6102 to the dollar, its weakest level since early February as worries about China's economy deepened after data showed growth in China's fixed-asset investment slowed to a 15-year low.
The onshore yuan also fell to near the critical support level of 6.60, a level not breached in more than five years.
Shanghai shares could test their May low on disappointment of their lack of inclusion in the MSCI.
(Additional reporting by Tomo Uetake; Editing by Sam Holmes)
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