Morning Chronicle - Markets extend global sell-off on inflation, rate fears

After a largely positive start to the week, Asian investors tracked their US and European colleagues in selling up as they contemplate higher borrowing costs and surging prices, which many fear could lead to a recession.

Adding to the unease was news that officials in China had once again locked down millions of people for Covid testing due to another flare-up in cases, dealing a blow to hopes for an economic reopening.

Still, the move helped push down oil prices -- a key driver of global inflation -- owing to concerns about the impact on demand.

With prices rising at a decades-high pace, central banks have been forced to withdraw the vast financial support measures put in place to combat the impact of the pandemic that helped fuel a rally across markets to record or multi-year highs.

The ECB became the latest to join the tightening campaign, announcing Thursday the end of its bond-buying programme and signalling it will hike rates several times this year.

It also sharply upgraded its inflation forecasts for this year and next while lowering the economic growth outlook.

Focus now turns to the release of US consumer price figures later Friday, with a strong reading likely to give the Federal Reserve more room to be aggressive.

"A robust May... print will probably prompt (policymakers) to hint at a 50 basis point hike for the September meeting," said SPI Asset Management's Stephen Innes.

"The tone will remain hawkish and the tough talk on inflation will continue."

However, he added that "the significant upward revisions to core inflation projections are close to ending. Risk markets could take solace if one or two participants shift to seeing the inflation outlook is more balanced".

Expectations are that the Fed will hike by half a point for at least three more meetings before January.

Other commentators also suggested that traders were looking for signs inflation may be close to its highs.

"The big question is whether inflation has peaked or not," said Matthew Simpson of StoneX Financial.

"Inflation may have softened to a degree in April, but traders really want to see further evidence that inflation is pointing lower to call 'peak inflation' with confidence.

"Besides, one single month of data doesn't define a trend."

And OANDA's Edward Moya said the darkening outlook could provide an argument for the Fed to apply the brakes to hiking later in the year.

"Warning signs about the economy are emerging as weekly jobless claims are starting to rise, China's Covid situation will prove troublesome for supply chains over the next couple of quarters, and as inflationary pressures broaden and show no sign of easing.

"It seems reductions in global growth forecasts will become a steady theme over the next few months and that should complicate how much more tightening we see from central banks."

Tokyo, Hong Kong, Sydney, Seoul, Singapore, Taipei, Mumbai, Bangkok, Wellington, Manila and Jakarta were all down.

London, Paris and Frankfurt opened down.

However, data showing Chinese producer price inflation eased last month to its lowest level in more than a year provided some cheer and gave officials a little room to unveil fresh stimulus measures for the beleaguered economy.

That helped Shanghai brush off the targeted lockdowns and buck the regional trend to rally more than one percent.

On currency markets the euro continued to struggle against the dollar after the ECB flagged a quarter-point hike, while the yen remained around two-decade lows to the greenback.

- Key figures at around 0720 GMT -

Tokyo - Nikkei 225: DOWN 1.5 percent at 27,824.29 (close)

Hong Kong - Hang Seng Index: DOWN 0.1 percent at 21,855.18

Shanghai - Composite: UP 1.4 percent at 3,284.83 (close)

London - FTSE 100: DOWN 0.5 percent at 7,442.31

Euro/dollar: UP at $1.0633 from $1.0620 late Thursday

Euro/pound: UP at 85.13 pence from 84.98 pence

Dollar/yen: DOWN at 133.87 yen from 134.40 yen

Pound/dollar: DOWN at $1.2490 from $1.2495

Brent North Sea crude: DOWN 0.3 percent at $122.72 per barrel

West Texas Intermediate: DOWN 0.3 percent at $121.21 per barrel

New York - Dow: DOWN 1.9 percent at 32,272.79 (close)

T.Grant--MC-UK