Asian shares fell on April 5 after a dismal Spanish bond sale heightened concerns about funding difficulties for weaker euro zone countries, further undermining sentiment hurt by fading expectations of more stimulus from the U.S. Federal Reserve.
European equity markets, however, were likely to rebound as losses on April 4 had offered investors a chance to book profits. Financial spreadbetters predicted major European markets would open as much as 0.5 percent higher.
U.S. stock futures were up 0.2 percent, after leading indexes fell 1 percent to 1.5 percent overnight.
"The weak bond auction results in Spain highlights a deeper underlying problem. The debt itself is not an issue as long as there is sufficient enough (economic) growth to support it, but Spain's weak growth outlook does not paint a pretty picture," said Park Suk-hyun, an analyst at KTB Securities.
MSCI's broadest index of Asia Pacific shares outside Japan fell for a second straight session, slipping as much as 1.3 percent to a four-week low at one point. It later recouped much of those losses and was last down 0.3 percent by early afternoon, as a sharp gain in Shanghai shares helped tame sentiment towards riskier assets.
Japan's Nikkei average also recovered most of it earlier losses to fall 0.3 percent, after shedding as much as 1.3 percent and hitting a four-week low.
Shanghai shares gained on a private sector survey of purchasing managers, which showed that China's services sector expanded in March and business confidence hit an 11-month high, though overall activity remained below its long-term average.
Risk currencies rebounded, with the Australian dollar off a near three-month low of $1.0245 hit on Wednesday, and the euro holding above $1.3100 after falling nearly 1 percent the day before. Gold and oil also recovered on April 5.
Spot gold inched up 0.3 percent to $1,624 an ounce after tumbling to its lowest in almost three months the previous day. U.S. crude futures rose 0.8 percent to $102.28 a barrel while Brent also added 0.8 percent at $123.36.
But Asian credit markets eased, pushing the spread on the iTraxx Asia ex-Japan investment-grade index 5 basis points wider.
The renewed risk aversion after a strong Asian equity performance in the first quarter comes as investors factor in less support for global economic growth from monetary policy, as well as the potential fading of the effects of the European Central Bank's huge liquidity injections.
"Widening peripheral European government bond spreads, higher Treasuries, higher implied vol, a lower EUR and a stronger USD are reminiscent of past episodes of elevated European concern," Barclays Capital analysts said.
ASIA WARY OF INFLATION
Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong, said market liquidity was very thin ahead of a long holiday weekend in much of the world, and investors were puzzling over mixed signals about economic and monetary policy outlook.
"Triggered by inflation pressures, the room for easing (by Asian central banks) is reduced now. Supply-side inflation is not good for the economy, so investors are more cautious," she said, but added that the current market downturn was a correction from strong performance earlier in the year.
Inflation in most Southeast Asian countries has slowed, so policymakers are likely to continue supporting growth by keeping rates steady, but they remain wary of the recent rise in oil prices.
ECB CALM ON SPAIN
Borrowing costs for Spain, the euro zone's fourth largest economy, jumped at bond auctions on Wednesday, with the 10-year yield leaping to 5.7 percent, its highest since January.
But ECB President Mario Draghi appeared relaxed about the rise in Spanish yields.
Draghi also dismissed a retreat from emergency crisis-fighting, but stressed the bank was keeping a close eye on price pressures, suggesting a shift in the ECB's monetary policy back to a more traditional one focusing on maintaining price stability.
While it was overshadowed by the Spanish woes, Portugal managed a successful return to debt markets on April 4.
Prime Minister Pedro Passos Coelho's success in maintaining broad support for painful reforms may have marked a political transition in the second-most risky country in the 17-nation currency area, which could help the country restore investor confidence.
As a sign the overnight sell-off might be overdone, a key gauge of how investors perceive risk, the VIX index, retreated from a near-one-month high on Wednesday after failing to stay above resistance at its 50-day moving average.
The VIX measures expected volatility in the Standard & Poor's 500 index over the next 30 days and its decline reflects easing risk aversion.
Thursday's upbeat U.S. private-sector jobs data by payrolls processor ADP raised hopes that a key non-farm payrolls report due on Friday will offer more evidence of a strengthening labor market.
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