Equities fall as risk on hold, US dollar steadies

* Nikkei down 1.8 pct, Asia ex-Japan stocks fall 1.2 pct

* Defensive sectors outperform

* Steady drum beat of soft data hurts risk ahead of US payrolls

* Can the Aussie dollar hold the line on risk?

By Kevin Plumberg

SINGAPORE, June 2 (Reuters) – Asian stocks dropped on Thursday, with investors spooked by a sell-off on Wall Street overnight and a steady stream of soft data from major economies that has put a damper on risk-taking ahead of Friday’s U.S. payrolls report.

Readings of economies around the world from China to the United States have been for the most part undershooting forecasts, raising questions about how well risky assets will hold up once the Federal Reserve’s $600 billion bond buying programme ends this month.

Even as big banks such as Citi and Goldman cut their payrolls growth forecasts, the equity market sell off was somewhat tame compared with previous bouts of so-called “risk off” in global markets.

The Australian dollar is considered by market participants to be a weather vane of investor tolerance for risk because of its relatively high yield and close economic relationship with China. That the currency remained in a range carved out last month was evidence that investors were not completely bearish on what have been winning bets for a long time.

For this reason, Australian retail sales due at 0130 GMT will be a focus for the Asian trading session.

Japan’s Nikkei share average fell 1.8 percent , in line with the 2.3 percent tumble in the S&P 500 U.S. stocks index overnight.

Political uncertainty also loomed over Tokyo, with a former prime minister joining the swelling ranks of ruling party rebels trying to oust Prime Minister Naoto Kan, raising the risk that a no-confidence vote will pass in parliament on Thursday forcing him to quit.

The MSCI index of Asia Pacific shares outside Japan was down 1.2 percent, with declines spread evenly across most sectors. Utilities and telecommunications stocks — traditionally segments of the market where investors stash their money in times of volatility — outperformed.

U.S. 10-year Treasury futures were up slightly after hitting a high for the year on Wednesday.

The sudden spill in U.S. stocks sent investors scurrying to the liquidity of the U.S. government bond market and sent the benchmark 10-year yield below 3 percent.

The 10-year note was retracing some of its overnight climb in early Thursday trade, bringing the yield back up a bit to 2.97 percent. A mix of selling in shorter maturity paper by speculators and mutual funds and central bank buying of longer dated debt made the yield curve its flattest of the year on Wednesday, Royal Bank of Scotland strategists said in a note.

The U.S. dollar was largely unchanged on the day versus a basket of major currencies.

The euro’s march above $1.44 on Wednesday was halted after Moody’s cut its sovereign rating on Greece by three notches. The currency was trading at $1.4340 on Thursday and risked backtracking further to its Monday low around $1.4250 if headlines on Greece suggest a new round of financing is in jeopardy.

At times contradicting headlines on prospects for Greece’s near-term financing has made the euro zig zag, though hopes for Greece were kindled after ECB Executive Board member Juergen Stark was quoted as saying the central bank might accept a rollover of Greek debt by private investors.