* Asia stocks give up early gains as China shares extend
fall
* Shanghai shares volatile, keep investors guessing
* Brokerage Everbright surges in Shanghai debut
* Australian dollar recovers despite wobbly stock markets
By Kevin Plumberg
HONG KONG, Aug 18 (Reuters) - Asian stocks retreated on
Tuesday, following Shanghai shares into the red and keeping
nerves frayed about whether further profit taking will end the
bull market that emerged from the financial crisis.
The Shanghai composite index <> fell 1.1 percent to a
two-month low, after suffering its biggest single-day drop in
nine months on Monday. Fears that China is slowly winding down
easy money policies are haunting investors.
The drop in China's market had a domino effect on other
markets, fueling worries that rallying asset prices have run
too far ahead of economic fundamentals and weak earnings
prospects.
U.S. equity futures <SPc1> gave up early gains and traded
roughly flat, reflecting the jolt to investor confidence.
However, one of the main drivers of the equity rally in
Asia, piles of money that monetary authorities pumped into
banking systems, may still have a supportive effect in coming
weeks, even with asset prices extended.
"History tells us when markets rise as much as they did in
the second quarter, they should come down. It's hard to say
where the floor is, but I don't think it's far from where we
are now," said Mark Matthews, Asia Pacific strategist with
Fox-Pitt Kelton in Hong Kong.
"This is a liquidity-driven bull market. It's not a market
being driven by valuations."
The MSCI index of Asia Pacific stocks traded outside Japan
<.MIAPJ0000PUS> slipped 0.8 percent after tumbling 3.7 percent
on Monday, the biggest daily decline since March 30.
But the index is still up 67 percent since March 9, when a
global equity rally began and signalled a marked improvement in
investors' comfort with taking risks for bigger returns.
Volatility in Shanghai dragged Hong Kong's Hang Seng Index
<> down 0.4 percent.
Japan's Nikkei share average <> also surrendered early
gains as China shares sank, and ended the morning down 0.8
percent.
EVERBRIGHT SOARS
Pressured by worries that the global economy may take
longer than expected to recover, and disheartened by mounting
losses in Shanghai, U.S. stocks posted their biggest one-day
fall in seven weeks on Monday, with profit taking also hitting
commodities. []
"I think macroeconomic indicators in general suggest that
things are improving globally and there's no reason to be so
pessimistic, but there's not a lot we can do about market
sentiment as long as stocks keep on falling," said Noritsugu
Hirakawa, a strategist at Okasan Securities in Tokyo.
Profit taking has knocked down the Shanghai index down
around 18 percent in the last two weeks after it jumped more
than 90 percent since the start of the year.
But the IPO boom in China gained pace, even if broader
investor demand was cooling. Shares of China brokerage
Everbright Securities Co <601788.SS> rose as much as 42 percent
in their debut in Shanghai before slightly paring early gains.
The tight relationship that the Australian dollar had had
with equities loosened some, with the currency up 0.3 percent
to US$0.8230 <AUD=> after minutes from the Reserve Bank of
Australia meeting underscored that policy would be tightened as
a recovery took hold. []
The U.S. dollar and the yen both retained broad gains on
uncertainty over the strength of a global economic recovery.
The ICE Futures U.S. dollar index <.DXY>, which tracks the
dollar's value against a basket of six currencies, was largely
unchanged, not far from a two-week peak of 79.514 hit on
Monday.
U.S. crude oil futures also steadied, rising 0.2 percent to
$66.88 a barrel after falling to a two-week low on Monday.
(Additional reporting by Elaine Lies in TOKYO)
(Editing by Kim Coghill)
