Asian shares stumbled on Friday amid rising doubts that a highly anticipated meeting between U.S. President Donald Trump and Chinese President Xi Jinping this weekend could lead to an easing of trade tensions.
Uncertainty over whether the talks will produce progress in ending the year-long trade war between the world's two largest economies comes amid signs of rising risks to global growth.
"I'm not sure the Americans can deliver what the Chinese want and the Chinese don't want to deliver what the Americans want," said Greg McKenna, strategist at McKenna Macro, adding that he sees an "extend and pretend" outcome, in which Chinese and U.S. officials agree to continue talks, as the most likely outcome of the weekend meeting.
Regardless of the outcome, McKenna said, "we will not be in a holding pattern on Monday morning."
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.3 percent, with weakness in Chinese equities weighing on the broader region. Japan's Nikkei stock index.
White House economic adviser Larry Kudlow said Thursday that Trump has agreed to no preconditions for the meeting, set to take place on Saturday at the G20 summit in Japan, and is maintaining his threat to impose new tariffs on Chinese goods.
Kudlow also dismissed a Wall Street Journal report that China was insisting on lifting sanctions on Chinese telecom equipment giant Huawei Technologies Co Ltd as part of a trade deal and that the Trump administration had tentatively agreed to delay new tariffs on Chinese goods.
On Thursday, China's central bank pledged to support a slowing economy as global risks rise, ahead of the release of data that is expected to show China's factory activity shrank for a second consecutive month in June.
Chinese blue chips .CSI300 fell 0.49 percent on Friday and Hong Kong's Hang Seng lost 0.59 percent. Australian shares were off 0.3 percent.
The losses followed gains in global equity markets overnight. But U.S S&P 500 e-mini stock futures ESc1 wavered on Friday, trimming early gains to trade flat.
"Central expectations for the G20 meeting between Trump and Xi are that negotiations will resume, additional U.S. tariffs will be delayed, China will buy more U.S. goods and talks over tech-trade will gain renewed focus," analysts at ANZ said in a morning note.
"However, as the difficulty of resolving economic aspirations between the two countries is herculean, markets remain cautious."
Seema Shah, global investment strategist at Principal Global Investors, said even if signs of progress emerge on trade, investors would quickly move on to U.S. interest rate policy.
"As the equity market is now fully pricing in a 50 basis point cut, market disappointment could be significant ... And if the Fed follows through with a cut despite a brighter trade outlook? Beyond the knee-jerk euphoria, expect minimal market reaction – this last scenario is exactly what the market is already expecting," she said in a note.
On Thursday, the S&P 500 .SPX rose 0.38 percent and the Nasdaq Composite .IXIC added 0.73 percent. The Dow Jones Industrial Average .DJI eased 0.04 percent, dragged down by losses in Boeing Co shares following a Reuters report that the U.S. Federal Aviation Administration identified a new safety risk in the planemaker's grounded 737 MAX aircraft.
Highlighting mixed market views on the outlook for the weekend's Sino-U.S. talks, yields on benchmark 10-year Treasury notes US10YT=RR rose to 2.0123 percent, compared with a U.S. close of 2.005 percent on Thursday, despite the reversal in equities.
The two-year yield US2YT=RR was flat at 1.740 percent, close to recent lows, reflecting near certainty that the Federal Reserve will cut benchmark interest rates in July.
The dollar was 0.19 percent lower against the safe-haven yen at 107.57 JPY=, while the euro was flat, buying $1.1368.
The dollar index .DXY, which tracks the greenback against a basket of six major rivals, was also virtually flat at 96.197 after hitting three-month lows earlier this week.
