SINGAPORE, Jan 10 (Reuters) – Asian stock markets were on the back foot on Tuesday as risk appetite evaporated overnight after the year’s strong start, with equities retreating, oil markets roiled by a supply surge and the pound sliding on renewed concerns about a "hard" Brexit.
MSCI’s broadest index of Asia-Pacific shares outside Japan was flat in early trade.
Japan’s Nikkei dropped 0.2 percent as investors took refuge in the safe-haven yen.
Oil prices on Monday posted their biggest one-day loss in six weeks amid fears that record Iraqi crude exports in December and rising U.S. output would undermine OPEC’s efforts to curb a global supply glut.
The Organization of the Petroleum Exporting Countries agreed in November to cut output for the first time since the global financial crisis more than eight years ago.
Iraq’s oil ministry emphasized that the high levels would not affect the country’s decision to cut January production to comply with the OPEC agreement.
But sources told Reuters that Iraq’s State Oil Marketing Company had given three buyers in Asia and Europe full supply allocations for February.
"It’s unusual to have these agreements last for very long because inevitably someone cheats," said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners.
"It’s certainly conceivable that the (OPEC) agreement falls apart and you get more production than anticipated in addition to already thinking that it should be lower because of dollar strength."
Last week, U.S. energy companies added oil rigs for a 10th week in a row, Baker Hughes data showed, with some analysts expecting the U.S. rig count will rise to 850-875 by the end of the year.
U.S. crude slumped 3.8 percent on Monday but were steady early on Tuesday, up 0.1 percent at $52.02 a barrel.
Global benchmark Brent also dropped 3.8 percent to $54.82 a barrel on Monday.
In currencies, sterling slumped 1 percent on Monday, extending Friday’s 1.1 percent slide, after British Prime Minister Theresa May said on Sunday the country would not be keeping "bits" of European Union membership, without providing more detail on her strategy.
May’s comments stoked fears of a "hard Brexit", in which border controls are prioritised over market access.
EU officials say Britain cannot have access to its single market of 500 million consumers without accepting the principle of free movement and have repeatedly warned May against trying to "cherry pick" the profitable parts of their union.
The pound was fractionally higher at $1.2164 early on Tuesday.
The drop in risk appetite pushed the dollar lower against the safe-haven yen.
The U.S. currency was down 0.28 percent to 115.67 yen in early trade on Tuesday, after declining 0.8 percent on Monday.
The dollar index, which tracks the greenback against a basket of six global peers, edged down 0.1 percent to 101.85, extending Monday’s 0.3 percent loss.
The euro climbed 0.1 percent to $1.0588 on Tuesday.
Gold shone amid investors’ quest for safety. Spot gold , which jumped to a more than one-month high on Monday, added 0.1 percent to $1,182.24 an ounce in early trade on Tuesday.