* MSCI ex-Japan hits lowest levels since mid-May
* European futures point to firmer start overseas
* Investors question reflation trade, move to safe-haven assets
* Risk sensitive currencies under pressure
SYDNEY, July 9 (Reuters) - Asian shares stumbled to two-month lows on Friday and were set for their worst weekly performance since mid-May as confidence took a battering over the global spread of the Delta virus variant and worries it could stall a worldwide economic revival.
European futures pointed to some stabilisation in the sell-off with Eurostoxx 50 futures and Germany’s Dax Futures up 0.4% and London’s FTSE futures rising 0.3%. E-Mini futures for the S&P 500 were a shade higher.
The mood in Asia seemed to have improved too by late afternoon, though major indices were still in red zone.
MSCI’s broadest index of Asia-Pacific shares outside Japan went as deep as 665.19, a level not seen since mid-May. It pared some of the losses to be last down 0.3% at 672.29.
For the week so far, the index is down 2.6%, the biggest decline since mid-May.
Japan’s Nikkei skidded 0.6%. Chinese shares were weaker too with the blue-chip CSI300 index off 0.3%.
Australian shares dropped 1.2%, with stay-at-home orders in Sydney, the country’s most populous city, tightened further to stop the spread of the Delta variant of the coronavirus.
Analysts said an accumulation of events have triggered a turn in sentiment rather than a single catalyst.
Fears central banks will choke economic recovery by tightening policy in their efforts to rein in inflation, a rapidly spreading Delta variant of the coronavirus around the world and still low rates of vaccination have darkened the outlook.
Also raising concerns for investors were political tensions in the Middle East, Russia and China while Beijing’s crackdown on foreign-listed Chinese firms took its toll too.
As a result, markets are now starting to question one of this year’s most successful trades, the so called reflation narrative -- bets that assets that benefit from a strengthening economy and higher inflation will outperform steadier, safer ones.
Overnight, the yield on 10-year Treasury notes was down 2.8 basis points to 1.293%. It fell as low as 1.25% earlier in the day. The 30-year Treasury bond slipped 1.9 basis points to 1.925%.
In equities, the Dow fell 0.7%, the S&P 500 lost 0.86% and the technology-focused Nasdaq dropped 0.7%.
“The rate move is a reflection of less accommodative Fed signals & some fading of reflation optimism with an uptick in COVID delta concerns,” analysts at Bank of America Securities wrote in a note.
“We believe these factors may continue to pressure rates lower until the market stabilizes and finds a catalyst for rates to re-price back to levels consistent with fundamentals.”
In late Asian trading, yields on the 10-year paper had bounced to 1.329%, though still nowhere close to 2021 highs of 1.776% reached in March.
Meanwhile, a reading on Thursday on the number of Americans filing new unemployment claims added to views that the job market recovery from the COVID-19 pandemic continues to be choppy.
In currencies, the risk sensitive Australian and New Zealand dollars were under pressure, down 0.1% each.
The safe haven yen hovered near a one-month high at 110.01 per dollar. The euro dipped to $1.1834.
That left the dollar index, which tracks the greenback versus a basket of six currencies, slightly firmer at 92.452.
Gold, another safe haven asset, was on track for its third straight weekly gain. It was last down 0.1% at $1,800 an ounce.
Oil prices added to overnight gains. Brent crude was up 14 cents to $74.26 a barrel. U.S. crude added 23 cents to $73.17 per barrel.
Reporting by Swati Pandey Editing by Shri Navaratnam