Asia closes in the red, China under pressure from Trump's investment restrictions

Major Asian indexes fell on Tuesday, worried about US investment restrictions on China, while a rally in the euro lost steam as investors waited for the formation of a new government in Germany headed by the CDU/CSU conservatives led by Friederich Merz.

European futures point to a flat open, with Stoxx 50 futures little changed .

In Japan, the Nikkei returned from a holiday with a drop of 1.39%. The Topix also did not escape losses and closed with a drop of 0.43%.

The Bank of Korea cut its interest rates by a quarter of a percentage point on Tuesday , as expected, helping to reduce some losses. The Kospi closed the session down 0.57%.

Hong Kong's Hang Seng Index closed in the red, down 1.39%. Chinese blue chips were under pressure, falling 0.8% . The Shanghai Composite also posted losses, falling 0.80%.

Shares in tech giant Alibaba had once propelled Hong Kong's index to three-year highs. However, the gains failed to hold and the Chinese tech giant ended up losing 3.2% after its U.S.-listed shares slid 10% overnight , the biggest daily drop in more than two years.

Investors have been rattled by an order from U.S. President Donald Trump to restrict Chinese investment in strategic areas such as semiconductors, artificial intelligence and aerospace. Washington is seeking to tighten restrictions on the export of semiconductor technology to China , with the help of allies, according to Bloomberg.

"Optimism about China's tech sector is cooling as markets realise that the brighter the outlook for the sector, the greater the risk of it being targeted by the US," Kyle Rodda, senior analyst at Capital.com, told Reuters.

Investors are now keeping a close eye on Trump's indication that proposed tariffs on Mexico and Canada are still set to take effect next week , although negotiations were expected to avert their imposition.