Asian stocks retreat on caution over earnings season

Asian stocks declined on Thursday, as disappointing quarterly corporate earnings offset potential gains from positive global economic data.

Japan's Nikkei led losses by 1 percent, Australia's benchmark index erased earlier losses to close flat, the Kospi retreated further from its six-week high and the Shanghai Composite closed below 2,030 points.

"Unlike the S&P 500, Asian markets have not regained from the sell-off from a couple of months ago," wrote Kelly Teoh, market strategist at IG.

"With the S&P 500 close to the 1,700 mark, there's a sense that the rally is limited, with valuations close to the highest level at 16 times. This will hamper further recovery in Asia," she said.

Signs of global recovery

Robust economic reports in the U.S. and Europe helped cap losses in Asian markets.

Data on Wednesday showed new U.S. home sales jumped 8.3 percent in June, the highest level since May 2008 while conditions in the U.S. manufacturing sector ticked higher in July. Meanwhile, the euro zone flash composite PMI rose to an 18-month high.

Nikkei below 14,600

Japanese automakers were in focus with Nissan Motor down 1 percent ahead of posting results for the April-June quarter after the market close. Nissan expects net profit to rise 24 percent for the fiscal year ending next March thanks to the weaker yen.

Camera makers Canon lost 5.7 percent while Nikon eased 4.7 percent after Canon lowered its full-year earnings forecasts due to weakening economic conditions in Europe and China.

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Construction equipment maker Komatsu fell 2.3 percent, tracking losses in U.S. peer Caterpillar after it reported a 43 percent loss in quarterly profit.

The Nikkei stock index is down 2.6 percent from last Friday's two-month peak of 14,953.

Shanghai 0.6% lower

In China, focus returned to the money markets. The seven-day repurchase rate briefly jumped to 6.5 percent before falling back after the central bank abstained from injecting funds into the market. This sparked some concern about a return to the credit crunch that plagued China's benchmark index in June.

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New measures by China's State Council helped support confidence. Beijing announced late on Wednesday that it will eliminate taxes on small businesses, reduce costs for exporters and line up funds for the construction of railways. The moves follow the release of HSBC's dismal preliminary China PMI on Wednesday.

As a result, railway stocks rallied with CSR Corp and China Railway Construction leading gains by 3 percent each while China Railway Group added 1.5 percent.

"China mini-stimulus? Wrong term. It's a supply-side kick. To call this a stimulus gives entirely the wrong impression of the nature of the measures," said Uwe Parpart, chief strategist and head of research at Reorient Financial Markets.

Kospi pares losses

South Korea's benchmark index closed six points shy of a new six-week high at the 1,915 mark thanks to strong growth data. The central bank reported that the economy grew 2.3 percent – a two-year high – in the second-quarter from the year before, topping forecasts.

"Domestic consumption has turned around, suggesting that the concerted efforts by both the government stimulus package and the central bank's rate cut in May have started to contribute. We believe the economy has bottomed out," wrote analysts from Australia and New Zealand Bank in a note.

Memory-chip maker SK Hynix jumped 2 percent before paring gains after reporting a record quarterly profit of $988.5 million.LG Electronics fell 2.4 percent, extending losses from the previous day after recording a slide in quarterly profit margins.

Hyundai Motor added half a percent after its second-quarter profit stayed near a record high, topping forecasts.

Sydney flat

A rout in gold miners knocked Australia's benchmark index off its previous two-month high of 5,053 points as the yellow metal extended losses from Wednesday's 2 percent fall.

The world's third biggest gold producer, Newcrest Mining, fell 1.2 percent after stating that it forecasts a flat year of gold output as it cuts operating costs. Meanwhile, Oz Minerals lost 7.3 percent after saying it would cut gold output and instead, lean more towards copper ore productions.

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Shares of engineering firm Ausenco slumped 31 percent after issuing a profit warning for its full-year performance.

The nation's top investment bank, Macquarie Group tanked 2.3 percent after indicating that its tax rate would remain near last year's high level. The news overshadowed its positive 2014 profit guidance.

— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC