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Asia shares slip as fears over Delta virus variant grow, U.S. data eyed

Asian shares dropped on Tuesday on concerns new coronavirus outbreaks in the region could undercut an economic recovery, even as robust momentum in the United States prompts the Federal Reserve to contemplate a quicker exit from accommodative policy.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.15% lower, hovering near recent highs, though momentum has stalled as some countries re-impose lockdowns to contain the spread of the Delta virus variant.

Japanese and Australian shares took the brunt of early losses, with the Nikkei falling 0.91% and the ASX/200 index down 0.37%, while the South Korean market was 0.71% lower.

Chinese stocks were also down 0.95% as investors booked profits after a rally on the back of the country's strong rebound from the impact of the COVID-19 pandemic, with financial and consumer firms leading the retreat.

Fears over the spread of the highly infections Delta virus variant are denting sentiment at a time markets are on edge after the Fed shocked traders with a hawkish tilt earlier this month.

It was a "wait and watch mode for markets ahead of the U.S. June employment report," Citigroup (NYSE:C) analysts said.

European stocks, which were weighed down on Monday as Hong Kong said it would ban passenger flights from the United Kingdom while infections spiked in California, looked set to extend their cautious tone.

EuroSTOXX 50 futures were 0.09% higher while FTSE futures moved 0.01% lower. U.S. stock futures, the S&P 500 e-minis, were also down 0.11%.

Australia is battling small but fast growing outbreaks with snap lockdowns in several cities, while Indonesia is also grappling with record-high cases, Malaysia is set to extend a lockdown and Thailand has announced new restrictions.

"U.S. growth will still be very strong in absolute terms, but ... the outbreaks of the Delta strain are causing some reasons for a little bit of doubt on that view, I think," said Ray Attrill, Head of FX Strategy at National Australia Bank (OTC:NABZY) in Sydney.

On Friday, a closely-watched U.S. jobs report for June will be released, which could sway the Fed's policy outlook and bring forward expectations for interest rate increases.

"Inflation is already much higher than the Fed was anticipating, so it is really the pace of improvement in the labour market that stands head and shoulders above every other indicator in terms of when the Fed will feel comfortable signalling the start of tapering," said Attrill.

News of a possible bipartisan U.S. infrastructure spending agreement over the weekend helped boost risk appetite overnight.

On Wall Street, the Nasdaq and S&P 500 had gained 0.98% and 0.23%, respectively, on Monday to hit all-time highs, fuelled by tech stocks as investors bet on a robust earnings season.

Big tech companies including Facebook Inc (NASDAQ:FB), Netflix Inc (NASDAQ:NFLX), Twitter Inc (NYSE:TWTR) and Nvidia (NASDAQ:NVDA) Corp were among the leaders, helping the S&P 500 sustain momentum after it registered its best weekly performance in 20 weeks on Friday. In contrast, the Dow Jones Industrial Average fell 0.44, and cyclical sectors dropped sharply on fears over the spike in COVID-19 cases across Asia.

In currency markets, the U.S. dollar held largely steady as investors stayed on the sidelines ahead of Friday's jobs report. The dollar index was trading 0.9% higher at 91.963.

Investors are also looking at U.S. consumer confidence data later on Tuesday as well as the Institute for Supply Management's manufacturing index on Thursday for clues as to where interest rates are headed.

Both the dollar and yen have benefited from some safe-haven demand driven by concerns over the spread of the Delta virus strain. The euro was at $1.1912, edging back toward the 2-1/2-month low of $1.8470 touched on June 18, while against the Japanese yen, the greenback was holding steady at 110.46 yen.

Yields for benchmark 10-year U.S. Treasuries were steady at 1.481.

Concerns over the virus spread also hit oil prices, which slipped for a second day as investors worried about slower fuel demand growth.

Brent crude was down 0.47% at $74.33 a barrel, while U.S. light crude was off 0.41% at $74.61 per barrel.

Spot gold was little changed at $1,777.05 per ounce by 05:24 GMT).

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