European shares fell on Tuesday, mirroring declines in Asia after the Bank of Japan painted a bleaker picture of the Japanese economy and helped push the yen higher, and as oil prices dropped again.
The Bank of Japan (BOJ) left policy on hold, as expected. Investors' attention now turns to a two-day meeting of the US Federal Reserve's rate-setters, who are likely to signal a slower pace of interest rate hikes than forecast after they raised the cost of borrowing in December for the first time in nearly a decade.
The BOJ, like the European Central Bank, has resorted to negative rates in an effort to spur growth and inflation.
The Fed signaled in its "dot plot" charts of the possible path of interest rates after its December hike that it could raise rates four more times this year. Economists say this could be reduced to three or even two.
Recent data has suggested the US economy is growing stronger, however, with fears of a return to recession much diminished compared with earlier this year.
"The Fed meeting is important because … there is a risk of a hawkish statement," RIA Capital Markets bond strategist Nick Stamenkovic said. "Investors will wait for the statement and the dot plots before taking new positions."
The pan-European FTSEurofirst 300 stocks index .FTEU3 fell 0.9 percent, led lower by commodity-related stocks. The STOXX Europe 600 Basic Resources index.SXPP was down 4.3 percent.
"There is still a soft demand coupled with excess supply story in the commodities spectrum," said Lorne Baring, managing director at B Capital Wealth Management.
Tokyo's Nikkei share index .N225 closed down 0.7 percent as a stronger yen hurt exporters. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS extended early losses and were down 1.2 percent.
Chinese shares eked out small gains. The CSI300 index .CSI300 of the largest listed firms in Shanghai and Shenzhen rose 0.3 percent and the Shanghai Composite .SSEC 0.2 percent.
In currency markets, the yen strengthened after the BOJ removed from its post-meeting statement language used after it lowered rates in January that it would cut rates further into negative territory if needed.
The dollar was down 0.7 percent at 113.03 yen JPY=.
The euro EUR= edged higher to $1.1108 and the dollar index .DXY, which measures the greenback against a basket of currencies, fell 0.1 percent.
Oil drops
Oil prices, which fell up to 4 percent on Monday, dropped further after the Organization of the Petroleum Exporting Countries (OPEC) said it expected lower demand for crude in 2016 than previously thought.
Brent crude LCOc1 last traded down 85 cents a barrel at US$38.68, raising the possibility that a six-week recovery in oil prices that has helped buoy stocks markets may be fading.
Euro zone government bond yields, which fell in the previous two days after the European Central Bank cut interest rates and expanded its asset-purchase scheme last Thursday, held steady.
US Treasury yields fell as investors squared up positions before the Fed meeting. Ten-year yields US10YT=RR fell 3.2 basis points to 1.93 percent.
Gold XAU=, up around 16 percent this year, held near two-week lows. It last traded around $1,234 an ounce.
