Asian shares on Friday were headed for their worst month since the onset of COVID-19, while jitters in currency and bond markets persisted over hawkish talk from central banks, worries about a global recession and rising geopolitical risk.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.3pc, taking its monthly loss to a staggering 13pc – the largest since March 2020 when the nascent pandemic threw financial markets into chaos.
Japan’s Nikkei tumbled 2.1pc, Australia’s resources-heavy shares dropped 1.2pc, while Hong Kong and China’s mainland blue-chips gave up earlier gains to trade slightly lower ahead of long holidays.
Barring a sharp reversal, Hong Kong shares were heading for their worst quarter since 2001 and Chinese blue-chips were set to record their biggest quarterly loss since a stock market meltdown in 2015.
Offshore risk appetite remained fragile. The pan-region Euro Stoxx 50 futures were up 0.1pc, FTSE futures eased 0.1pc and S&P 500 futures rose 0.1pc.
“The ‘troubling triad’ of rising rates, slowing growth and strong dollar have all intensified,” said Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs.
“We reduce our forecasts further and expect largely flat regional performance over the next two quarters with better returns on a 12-month view.”
Japan’s factories ramped up output in August and China’s factory activity returned to growth this month, data showed, but that failed to soothe investors for long.
The Reserve Bank of India also raised the repo rate by 50 basis points to 5.90pc on Friday as widely expected, as it continues to battle painfully high inflation and a rapidly weakening rupee.
Currency traders remained edgy given the risk of central bank interventions. Sterling rose 0.3pc in thin and volatile trading to $1.12, having its best week since end of 2020, after intervention from the Bank of English to buy long-dated bonds calmed markets.
The dollar climbed 0.3pc against a basket of major currencies on Friday and is up 3.1pc for the month, the best since April.
The U.S. currency’s relentless rise has pushed the yen, Chinese yuan and many emerging market currencies to long-term lows, piling pressures on policymakers to step in.
China’s central bank has asked major state-owned banks to be prepared to sell dollars for yuan in offshore markets.
In Europe, Britain’s gilt market has been roiled by government plans for heavy borrowing to finance spending.
Prime Minister Liz Truss said on Thursday she will stick to her plan to reignite economic growth, breaking her silence after nearly a week of financial market chaos.
German Chancellor Olaf Scholz also set out a 200 billion euro ($196 billion) “defensive shield”, including a gas price brake and a cut in sales tax for the fuel, to protect companies and households from the impact of soaring energy prices.
That came as Europe braces for a double-digit inflation reading later in the day, as the European Central Bank voiced support for another big interest rate hike. German inflation accelerated to 10.9pc this month, far beyond market expectations.
“Increased uncertainty and risks – and higher interest rates – logically see higher volatility in financial markets. Even G7 countries are now trading like emerging markets,” said Jan Lambregts, head of global economics and markets research at Rabobank.
“Indeed, markets now also see a far wider range of possible outcomes when it comes to FX and rate movements.”
U.S. Treasuries stabilised somewhat after a renewed bout of selling on hawkish talks from Federal Reserve officials, with the yield on 10-year bonds up by 5 basis points to 3.7943pc.
The two-year Treasury yield rose a similar amount to 4.2188pc.
A strong U.S. jobs market, with weekly jobless claims hitting a five-month low, adds to the case for more aggressive tightening from the Fed.
Overnight hawkish comments from Fed officials offered no indication that recent foreign exchange and bond market drama will lead the central bank to back off from its rate hike course.
Further weighing on market sentiment, Russian President Vladimir Putin is scheduled to announce the annexation of four Ukrainian regions on Friday, a move the United Nations said would mark a “dangerous escalation” and jeopardize prospects for peace.
Oil prices eased. U.S. crude lost 0.3pc to trade at $81.04 a barrel while Brent crude fell 0.7pc to $87.89 per barrel.
Gold was slightly higher. Spot gold was traded at $1662.5 per ounce. ($1 = 1.0195 euros)
