SYDNEY: Asian shares slid on Monday as a mounting risk of more aggressive rate hikes in the United States and Europe shoved bond yields and the dollar sharply higher while also stoking fears of a global recession.
Federal Reserve Chair Jerome Powell's promise of policy "pain" to contain inflation quashed hopes that the central bank would ride to the rescue of markets as so often in the past.
The tough-love message was driven home by European Central Bank board member Isabel Schnabel, who warned over the weekend that central banks must now act forcefully to combat inflation, even if that dragged their economies into recession.
That triggered a sharp fall in Euribor futures as markets priced in the risk the ECB could hike by 75 basis points next month and a higher peak for interest rates.
"The main takeaways are taming inflation is job number one for the Fed and the Funds Rate needs to get to a restrictive level of 3.5-4.0%," said Jason England, global bonds portfolio manager at Janus Henderson Investors.
"The rate will need to stay higher until inflation is brought down to their 2% target, thus rate cuts priced into the market for next year are premature."
Futures are now pricing in around a 73% chance the Fed will hike by 75 basis points in September and see rates peaking at 3.75% to 4.0% and staying there for longer.
Much might depend on what the August payrolls figures show this Friday. Analysts are looking for a moderate rise of 285,000 following July's blockbuster 528,000 gain.,
The hawkish message was not what Wall Street wanted to hear and S&P 500 futures were down a further 0.9%, having shed almost 3.4% on Friday. Nasdaq futures lost 1.2%, with tech stocks pressured by the outlook for slower economic growth.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.0%, in the biggest daily drop in two months. Japan's Nikkei dived 2.5%, and South Korea 2.1%.
Chinese blue chips lost 0.7%, while EUROSTOXX 50 futures slid 1.3% in the wake of the ECB's rate warnings.
The aggressive chorus from central banks lifted short-term yields globally, while further inverting the Treasury curve as investors priced in an eventual economic downturn.
Two-year U.S. yields surged nine basis points to 3.489%, the highest since late 2007 and far above the 10-year at 3.13%. Yields had also climbed across Europe with double digit gains in Italy, Spain and Portugal.
All of which benefited the safe-haven U.S. dollar as it shot to a fresh two-decade top of 109.450 against a basket of major currencies, breaching the previous high from July.
The dollar hit a five-week peak on the yen and was last up 1% at 138.94, with bulls looking to re-test its July top of 139.38.
Sterling sank to a 2-1/2-year low of $1.1653 as Goldman Sachs warned the UK was heading for recession. The euro was struggling at $0.9920, and not far from last week's two-decade trough of $0.99005.