The Hong Kong Exchanges flag, Chinese national flag and Hong Kong flag fly outside the Hong Kong Stock Exchange. Picture: REUTERS
The Hong Kong Exchanges flag, Chinese national flag and Hong Kong flag fly outside the Hong Kong Stock Exchange. Picture: REUTERS

Tokyo — Asian stocks fell on Tuesday as the lift from an agreement that saved the US-Canada-Mexico free trade deal faded. Cautious views on the global economy curbed risk sentiment.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1% after a steady start.

Australian stocks lost 0.8% and South Korea's Kospi fell 0.45%.

Japan's Nikkei was flat, handing back earlier gains after briefly rising to a new 27-year high.

China's financial markets are closed for the week of October 1-5 for national holidays.

Hong Kong's Hang Seng, which did not trade on Monday due to a holiday, dropped 1.5% in reaction to signs of weakness in the Chinese manufacturing sector shown in purchasing managers' index (PMI) numbers released on Sunday.

"While news that the US and Canada had struck a new Nafta trade deal gave the S&P 500 a lift overnight, dark clouds are gathering," strategists at OCBC Bank wrote in a note.

"With some signs of weakness in the European and Asian manufacturing PMIs, Asian markets may trade with a slightly more cautious tone."

IHS Markit purchasing managers' indices released on Monday showed manufacturing growth in the eurozone slowed to a two-year low at the end of the third quarter.

The US and Canada forged a last-minute deal on Sunday to salvage a trilateral trade pact with Mexico, rescuing a $1.2-trillion open-trade zone that had been about to collapse after nearly a quarter of a century in operation.

The Dow Jones industrial average rose 0.73% and the S&P 500 gained 0.36% on Monday after the deal helped ease trade worries.

"There were concerns that the resulting confusion would exceed that of the US-China trade row if Nafta was scrapped. While it appears like Canada and Mexico caved in to the US, the outcome is positive for global trade and the economy," said Yoshihisa Maruyama, chief market economist at SMBC Nikko Securities in Tokyo.

The Canadian dollar traded at C$1.2806 to the dollar on Tuesday, after rallying to a four-month high of C$1.2782 overnight following the trilateral trade pact.

The euro was little changed at $1.1573 after slipping 0.25% on Monday on renewed concern about heavily indebted Italy's budget.

The single currency has been hurt by fear that a significant increase in the Italian budget will deepen Italy's debt and deficit problems.

The dollar was at ¥113.895 after scaling an 11-month high of ¥114.06 on Monday, as improving investor risk sentiment weighed on the Japanese currency.

The yen is usually seen as a safe haven at times of turmoil but recedes when risk appetite returns.

The dollar index against a basket of six major currencies stood at 95.315 on Tuesday following a rise to 95.373 overnight, its highest since September 10.

The greenback drew support from an uptick in US treasury yields as Wall Street gains curbed demand for safe-haven debt.

In commodities, US crude futures were up 0.25% at $75.48 a barrel.

Crude contracts surged nearly 3% to $75.77 a barrel on Monday, their highest since November 2014, as the deal to salvage Nafta stoked economic growth expectations, with impending US sanctions on Iran seen raising prices.

Brent crude edged down 0.05% to $84.94 a barrel on Tuesday after rallying 2.7% the previous day to $85.45, its highest since November 2014.