Asian investors took fright Thursday at a forecast-busting reading on the US services sector that revived speculation the Federal Reserve could lift interest rates again, compounding a spike in oil prices that has fanned fresh inflation fears.
Wall Street dived and Treasury yields rose after the release of the Institute of Supply Management figures, which dealt a blow to hopes the US central bank had reached the end of its tightening cycle following a string of recent positive data.
The reading put further upward pressure on the dollar, with the yen particularly in focus as it sat at its weakest point for 10 months — when Japanese officials intervened in money markets last year to prop it up.
After a rosy couple of weeks, the gloom that has characterised markets for much of the summer has returned as traders contemplate the possibility of more tightening and borrowing costs kept elevated for an extended period to tame inflation.
Decision-makers at the Fed have given differing views on the best way forward, with some calling for more hikes and others suggesting rates are high enough.
Boss Jerome Powell has asserted that all decisions will be made based on how the data stacks up over the coming months.
While the economy and the jobs market have shown continued strength, there is a growing worry on trading floors that more than a year of increases -- and any more should they come -- could tip the United States into recession.
"The ISM services sector report underscores the resilience of the largest portion of the economy," said LPL Financial's Quincy Krosby.
"This is certainly not good news for a data-dependent Fed."
The Fed is due to make its next policy decision on September 20.
Hong Kong and Shanghai shed more than one percent as data showed Chinese exports and imports fell again in August, with traders shrugging at the fact the readings were better than expected and an improvement on July.
Michael Hewson, of CMC Markets, said the reading "did show an improvement on the July figures but given how poor these were it was a low bar".
Bleak yen outlook
Tokyo, Sydney, Seoul, Singapore, Taipei, Jakarta, Mumbai, Wellington and Manila were also well down.
London opened deep in the red, while Paris was also down.
"What's good news for the economy is bad news for markets," said SPI Asset Management's Stephen Innes.
"Currently, we are seeing the downside risk associated with positive growth news, especially when paired with investors fretting about the possible persistent inflationary impacts of higher oil prices."
Crude dipped but held at its November highs on supply concerns after Russia and Saudi Arabia extended their output cuts to the end of the year, and some commentators have warned they could go back to $100 a barrel.
Rate hike talk has seen the dollar maintain its strength against its peers, and investors are keeping watch on Japan after its top currency official on Wednesday made a verbal intervention, saying authorities were ready to take action when needed.
The yen inched higher Thursday but remains under added pressure owing to the Bank of Japan's refusal to move away from its ultra-loose monetary policy.
JP Morgan Chase's head of markets research for the country warned the unit could face further weakness.
"The yen is likely to be one of the weakest currencies even next year," Tohru Sasaki, a former trader at the BoJ said in an interview, according to Bloomberg News.
"I'm not sure how we can get out of this situation," he added.
"Maybe the BoJ needs to hike the policy rate without thinking of the other negative impacts on the economy. But that will cause the unpopularity of the (Prime Minister Fumio) Kishida cabinet, so it's politically difficult."
