Asian, European markets drop as Fed worries offset China Covid easing

Most Asian and European markets fell Tuesday and the dollar rose as fresh fears that the US Federal Reserve will push interest rates higher than hoped overshadowed growing optimism over China's economic reopening.

After a strong start to the week in Asia, traders tracked a big drop on Wall Street that came on the back of data showing a forecast-busting jump in activity in the US services sector last month.

The news -- combined with Friday's bigger-than-expected print on November jobs and wage increases -- dented optimism that the Fed's monetary tightening campaign was finally paying off, which would give it room to take a less hawkish approach into the new year.

Markets had been running higher ahead of the jobs figures after a surprise drop in inflation and comments from Fed boss Jerome Powell that the bank would likely raise rates at a slower pace.

"Outstanding news from the vast services-based US economy is devastating for market participants keen to see evidence of the US economic disintegration," said SPI Asset Management's Stephen Innes.

"Coming as it did on the heels of Friday's jobs report, which indicated that the rumours of the US economic demise were greatly exaggerated, the market immediately moved into 'good news is bad' mode, which saw investors ride roughshod over the dovish pivot camp."

Bets have increased on borrowing costs going higher than five per cent next year -- from the current 3.75 to 4.0 per cent -- before the bank pauses, with no cuts seen until 2024.

All three main indexes on Wall Street lost more than one per cent and Asia struggled to maintain its recent momentum.

Hong Kong dropped after soaring around 15 per cent over the past week on China's easing of strict Covid containment measures.

Sydney, Seoul, Singapore, Wellington, Mumbai, Bangkok, Taipei and Jakarta were also in the red.

Shanghai was barely moved while Tokyo rose. Manila was up more than three per cent as banks were boosted by a forecast-beating jump in inflation that ramped up expectations for a hike in interest rates.

London, Paris and Frankfurt all slipped at the open.

The dollar extended most of the gains made Monday after the services data release. The Australian dollar was among the biggest losers after the country's central bank lifted interest rates to a decade high but by less than expected.

The mood in Asia remains largely positive owing to the prospect of China rolling back some of the harsh measures that have been in place for almost three years and have hammered the giant economy.