* Asian shares slide as traders take profits on Monday
rally
* Spot yuan pulls back despite higher PBOC mid-point
setting
* Aussie, euro retreat as yuan slips
* Eyes on UK budget after credit rating downgrade warning
By Umesh Desai
HONG KONG, June 22 (Reuters) - Asian stocks and commodities
retreated on Tuesday as wary investors took profits from a
rally ignited by China's weekend decision to give its currency
more flexibility.
European shares were expected to follow Asian and U.S.
stock markets into the red, with Britain's FTSE 100 <>,
Germany's DAX <> and France's CAC-40 <> seen opening
as much as 1 percent lower.
In addition to concerns about China, financial markets
turned cautious ahead of Britain's budget later in the day,
which is expected to contain massive spending cuts and tax
rises as worries about sovereign debt levels spread throughout
Europe.
China's currency reforms initially sparked a global rally
in riskier assets on Monday on hopes that a stronger yuan would
boost its already formidable purchasing power for imported
goods and raw materials, giving the global economic recovery a
much-needed shot in the arm.
But that euphoria quickly vanished as investors took a more
considered view of the impact the move would have on China's
actual near-term demand and grew sceptical about how much
Beijing would allow the yuan to rise.
Big Chinese state-owned banks kept the yuan in check on
Tuesday, a day after its biggest rise since the currency was
revalued in 2005, indicating Beijing will allow the currency to
appreciate at a far slower pace than demanded by its critics in
the West. []
Japan's Nikkei <> slipped 1.2 percent as foreign
investors turned sellers after the benchmark powered to a
one-month closing high in the previous session.
The MSCI index of Asia Pacific ex-Japan stocks
<.MIAPJ0000PUS> fell 1 percent, with losses in technology
<.MIAPJIT00PUS> and resources <.MIAPJMT00PUS> sectors providing
the main drag. On Monday, the index had bolted 3.2 percent to a
five-week high as China allowed the yuan to rise.
"I don't believe China is doing this because the world is
in fantastic shape and the outlook is exceedingly bright," said
Emil Wolter, head of regional strategy at Royal Bank of
Scotland.
"They are doing it for political reasons," he said
referring to a meeting later this week of leaders of the Group
of 20 leading industrialized and developing economies in
Canada, where global trade imbalances are expected to be a key
issue.
Wolter said China's announcement on the yuan was a welcome
respite for markets after the worst May in 12 years, which had
seen investors take substantial short positions. The size of
the gains on Monday may have been amplified as traders
scrambled to close out such bets against the market.
"Sell in May and go away" is an old stock market adage
which refers to the seasonal weakness in shares.
Attention will also be focused on whether the U.S. Federal
Reserve will reiterate its commitment to keeping interest rates
exceptionally low for an "extended period" at the end of its
two-day meeting on Wednesday. []
CHINA SYNDROME
China's central bank set the yuan's daily mid-point
<CNY=SAEC> at 6.7980 against the dollar on Tuesday, the highest
level since the yuan's revaluation in July 2005, signalling it
could allow the yuan to rise further.
But the move gave markets only a brief respite from early
selling pressure as the spot rate soon fell. The yuan rose to
as high as 6.7900 in early trade, up 0.11 percent from Monday,
when it jumped nearly 0.5 percent. But by afternoon it had
slipped 0.35 percent.
Tuesday's fixing initially reignited demand for riskier
currency trades, with the Australian dollar <AUD=> and the euro
<EUR=> jumping to the day's high against the dollar. But again
the rise was short-lived and by afternoon the euro <EUR=>
dipped 0.27 percent to $1.2289.
The Australian dollar rose as high as $0.8834 <AUD=D4>, up
from around $0.8765 just before the mid-point was announced.
The Australian dollar then dipped and by afternoon it was flat.
"Investors are growing more cautious on the view that the
magnitude of the yuan's new flexibility may not be as big as
the market had earlier hoped," said Lee Sun-yeb, a market
analyst at Shinhan Investment Corporation in Seoul.
"It seems the market is taking a bit of breather following
its recent sharp gains, as it nears the earlier highs. Foreign
buying has also halted."
Analysts expect more volatility ahead as markets test how
much yuan appreciation Beijing is willing to stomach.
"The authorities want to say they are showing a more hands
off approach and more flexibility in the markets, but the
reality is they are introducing more intraday volatility in the
market," said Craig Chan, senior FX strategist at Nomura
International.
(Additional reporting by Saikat Chatterjee in HONG KONG and
Jungyoun Park in SEOUL; Editing by Kim Coghill)
