Euro and stocks slip on slowdown caution

The euro and Asian stocks slipped on Tuesday on creeping suspicion that a peak in the recovery has passed and slowing growth in China and Europe in the second half of the year will be obstacles to risky trades.

Major European stock futures were down 0.6 percent, indicating a slightly lower open, with traders looking cautiously at declines in Chinese manufacturing gauges and BP's attempt to plug a disastrous oil leak in the Gulf of Mexico failed.

After the most volatile month of trading since the wake of Lehman Brothers' failure in the fall of 2008, investors now focussed on pricing in to what extent reduced demand from the more fiscally austere euro zone would hit production in economies like China and South Korea.

Dealers brushed aside stronger-than-expected May export growth figures from Korea, which precede the rest of Asia, and solid Australian retail sales, taking more interest in forward-looking manufacturing indexes from China and India.

Indian factory activity was at a 27-month high in May, a private sector index showed. However, growth in China's factory output slowed and hiring eased in response to a critical drop in new orders, an official survey showed.

"The result indicates weakening of momentum in the manufacturing sector and confirms our expectation that GDP growth will slow sharply in Q2 and continue decelerating in Q3" Dariusz Kowalczyk, chief investment strategist with SJS Markets in Hong Kong, said in a note.

The Australian dollar held on to most of its losses on the day after the Reserve Bank of Australia stood pat on rates and said after a policy meeting they would remain unchanged in the near term. The RBA said global growth would be close to trend this year, although the euro sovereign debt crisis meant continued weakness in Europe.

The Canadian dollar was largely unchanged before an expected rate rise from the Bank of Canada that would make it the first G7 central bank to tighten policy after the financial crisis.

CYCLICAL SECTORS UNDER FIRE

Declines in equity markets were modest, though cyclical sectors such as technology and consumer discretionary appeared more vulnerable to selling pressure.

Japan's Nikkei share average fell 0.6 percent with Fast Retailing, which owns the Uniqlo casual clothing line, leading the index lower.

The Nikkei tumbled 11.7 percent in May, the largest monthly drop since a 23.8 percent plunge in October 2008.

The MSCI index of Asia Pacific ex-Japan stocks, which has been underperforming world equity markets so far this year, fell 1.1 percent, with the consumer discretionary sector the biggest drag.

U.S. stock futures were down 0.4 percent after a long holiday weekend in the United States and Britain.

There were more than enough reasons to keep winding down portfolio risk, especially after the European Central Bank warned overnight of a "second wave" of writedowns at lenders of up to 195 billion euros.

The euro was down 0.2 percent to $1.2275, about a cent and a half away from a four-year low hit against the dollar last month. The currency is down 14 percent so far this year.

Traders were not in a mood to sell Treasuries or gold, with risk reduction still the order of the day. The benchmark yield on the U.S. 10-year note was at 3.30 percent, down around 50 basis points since the end of March when fears about Europe's fiscal health picked up.

Gold climbed 0.4 percent to $1,218 an ounce, having rebounded about $45 in the past week.