A strong corporate earnings season has provided some much-needed support to investors in recent weeks as companies showed resilience in the face of supply snarls, surging commodity and wage costs, and spiking Covid cases.
But long-running friction between Washington and Beijing continues to cast a dark shadow over trading floors, with the two sides locked in a stand-off over a range of issues including Taiwan, national security, technology, trade and Hong Kong.
On Tuesday, the Federal Communications Commission cancelled the operating licence of China Telecom's US unit saying it "raised significant national security and law enforcement risks".
The move came after a clampdown by Donald Trump's White House on other giants including Huawei and China Mobile.
US-listed Chinese tech firms sank, and their stocks in Hong Kong also suffered hefty selling, pulling the Hang Seng Index 1.6 percent lower.
The Hang Seng Tech Index lost more than three percent, with Tencent, Alibaba, JD.com and XD Inc among those taking a hit in morning trade.
The move "seems to dampen previous hopes that the US-China relations may be turning for the better", said Jun Rong Yeap of IG Asia. It "has raised some doubts as to whether further escalation may bring back more US scrutiny on Chinese technology players".
Most of the rest of Asia was also in the red as a forecast-beating jump in Australian core inflation added to broad fears about soaring global prices that are forcing central banks to remove the ultra-loose monetary policies put in place at the start of the pandemic.
Downside risks remain
With some countries having already lifted interest rates, the United Kingdom is expected to follow suit before the year's end, while the US Federal Reserve will likely taper its bond-buying programme next month and hike borrowing costs in mid-2022.
Investors are hoping for clues about the European Central Bank's plans when it holds its latest meeting on Thursday.
Tokyo, Shanghai, Seoul, Wellington, Bangkok, Manila and Jakarta all dropped, though Sydney, Singapore, Taipei and Mumbai rose.
London, Frankfurt and Paris all fell in the morning.
Traders were largely unmoved by another record close for the Dow and S&P 500 on Wall Street.
However, observers remained upbeat that the global recovery, while slowing, will continue to favour companies' bottom line.
"Downside risks to the economy remain but investors are opting to look beyond these as companies continue to give us plenty of reason to be optimistic about what lies ahead," said Craig Erlam of OANDA.
Such "enthusiasm may come and go, creating plenty of two-way action in the markets", he added.
Still, Citigroup warned profit growth could be near its peak.
Oil markets fell but remained around multi-year highs on expectations about surging demand and concerns over supplies.
Investors are also keeping tabs on the crisis in China's property sector with several developers struggling to meet their debt obligations, while industry giant China Evergrande faces a new deadline at the end of the week to avoid a default.
Authorities called on the firm's tycoon boss Xu Jiayin to dip into his own pocket to ease its financial problems, reports said.
However, with liabilities of more than $300 billion, and his net worth at less than $8 billion, it is unlikely that would make much of a difference.
Key figures around 0810 GMT
Tokyo - Nikkei 225: FLAT at 29,098.24 (close)
Hong Kong - Hang Seng Index: DOWN 1.6 percent at 25,628.74 (close)
Shanghai - Composite: DOWN 1.0 percent at 3,562.31 (close)
London - FTSE 100: DOWN 0.1 percent at 7,273.58
Dollar/yen: DOWN at 113.72 from 114.14 yen at 2040 GMT
Pound/dollar: DOWN at $1.3750 from $1.3767
Euro/dollar: UP at $1.1605 from $1.1604
Euro/pound: UP at 84.40 pence from 84.26 pence
West Texas Intermediate: DOWN 1.6 percent at $83.26 per barrel
Brent North Sea crude: DOWN 1.3 percent at $85.24 per barrel
New York - Dow: UP less than 0.1 percent at 35,756.88 (close)
