By ALEX FRANGOS
HONG KONG—Signs of economic sluggishness in China and renewed European debt woes weighed on Asian markets Monday, raising questions about whether a bigger change in market sentiment is under way.
Stock markets from Japan to India were in the red, and the U.S. dollar rose broadly as investors pulled back from risky bets. The selloff sent several benchmark stock indexes into negative territory for the year, including Hong Kong's Hang Seng Index, which fell 2.1% in afternoon trading to its lowest level since March 22. It is now down nearly 6% over the last month. China's Shanghai Composite fell nearly 3% to below 2775, down more than 1% for the year and down nearly 8% over the past 30 days.
The immediate preoccupation among traders was the intensifying situation in Europe, where local Spanish elections that flipped power to the opposition created jitters that revelations of worse-than-expected debts among municipal governments could be ahead. And Standard & Poor's put Italy's bond rating on negative watch late Friday. The euro was 0.8% lower against the dollar during London trading to $1.399, its lowest level since mid-March.
Also at play are emerging signals that some sort of deceleration in the global economy, including in China, is at hand. That has left investors wondering if what is happening is a short-term breather in growth or the start of something more serious.
"The question is, is this cycle over," said Khiem Do, fund manager for Barings Asset Management in Hong Kong, where he oversees $10 billion of investments. His firm used softening economic indicators in the U.S., Asia, and Europe in recent weeks as a cue to cut exposure to stocks and hold more cash and government bonds.
Mr. Do, however, doesn't think there is a double-dip in store and likens the current situation to mid-cycle corrections that markets experienced in 1994 and 2004. Those were followed with bull runs. "We can't build a bear market case," he said.
A preliminary read of an HSBC purchasing managers index for China slowed to its lowest rate in 10 months in May. At 51.1, the index is still in positive territory, above 50, but below the long-term average of 52.3. Business surveys in the U.S. last week pointed to a downshift in industrial activity there. April's export orders from Taiwan and freight volumes from Hong Kong's airport, the world's busiest cargo hub, point to a mild slowdown in trade growth.
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An investor checks stock movements at a brokerage firm in China's Liaoning province on Monday.
The signs of moderation please some investors, who figure that measures to slow growth and fight inflation are working. China's inflation rate was 5.3% in April, above the government's 4% target.
"You need to see the leading indicators like PMI slow down first, then inflation figures will follow, and then policy makers will start to get happy and they will gradually focus on a more pro-growth or stabilized-growth policy," said Oscar Leung, senior investment manager for ING Investment Management in Hong Kong.
Yet he figures it will take at least another month or two of economic data for investors to decide if inflation has been tamed. So worries persist that price rises could get out of control and a heavier dose of tightening will be needed down the road.
The Australian dollar, seen as a proxy for Chinese growth, fell nearly 1% against the U.S. dollar to $1.053. It hit a post-1983 float high of $1.10 in late April. Australia benefits from strong Chinese demand for natural resources such as iron ore, coal and natural gas.
The U.S. dollar also rose nearly 1% against the South Korean won, and more than 1% versus the South African rand and Malaysian ringgit, currencies that benefit when investors are in risk-taking moods. Crude oil futures traded on the New York Mercantile Exchange dropped 2.5% and traded at 97.61 a barrel.
The timing of the market swoon isn't good for Asia's investment bankers, who have a full pipeline of deals. Hong Kong alone expects more than $9 billion in initial public offerings this week and next, including for fashion house Prada SpA, luggage maker Samsonite Corp., Australian miner Resourcehouse Ltd. and casino operator MGM China Holdings Ltd. Successful IPOs often rely on good market timing, so a prolonged bout of general pessimism can make the job of raising capital much harder.
Write to Alex Frangos at alex.frangos@wsj.com
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