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Stocks continue to slide, the dollar climbs on the hubbub of rates | Business Section

SYDNEY (Reuters) — Asian stocks fell on Monday as the growing risk of more aggressive rate hikes in the United States and Europe pushed bond yields and the dollar higher, and tested stock valuations and earnings.

Federal Reserve Chairman Jerome Powell’s promise of political “pain” to rein in inflation dashed hopes that the central bank would come to the rescue of markets as so often in the past.

The message of tough love was delivered by European Central Bank board member Isabel Schnabel, who warned over the weekend that central banks must now act forcefully to fight inflation, even if this drives their economies into recession.

This triggered a sharp decline in Euribor futures, with markets pricing in the risk that the ECB could rise 75 basis points next month.

“The key takeaways are that controlling inflation is the Fed’s number one task and that the funds rate should reach a restrictive level of 3.5% to 4.0%,” said Jason England, Global Bond Portfolio Manager at Janus Henderson Investors.

“The rate will need to stay higher until inflation is brought back to its 2% target, so the rate cuts expected in the market for next year are premature.”

Futures now price around a 64% chance that the Fed will hike 75 basis points in September and rates will peak in the 3.75-4.0% range.

Much could hinge on what the August payrolls numbers show on Friday, as analysts expect a moderate rise of 285,000 after July’s dramatic 528,000 gain.

The hawkish message was not what Wall Street wanted to hear and S&P 500 futures fell another 1.1%, after losing nearly 3.4% on Friday. Nasdaq futures fell 1.5% as tech stocks came under pressure from prospects of slowing economic growth.

MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 1.9%. The Japanese Nikkei fell 2.8%, while South Korea lost 2.3%.

Chinese blue chips lost 0.6%, while EUROSTOXX 50 futures slid 1.7% on ECB rate warnings.

The euro struggles

The aggressive chorus of central banks lifted short-term yields globally, while further inverting the Treasury curve as investors priced in a possible economic slowdown.

US two-year yields rose seven basis points to 3.466%, the highest since late 2007 and well above the ten-year yield at 3.10%. Yields also climbed across Europe with double-digit gains in Italy, Spain and Portugal.

All of this benefited the safe-haven US dollar, which hit a new two-decade high at 109.40 against a basket of major currencies, surpassing the previous high in July.

The dollar gained 0.7% to hit a five-week high against the yen at 138.58, as bulls look to retest its July high at 139.38.

The euro was in trouble at $0.9927, not far from last week’s 20-year low of $0.99005, while the pound slid to a 2.5-year low at $1.1656.

“EUR/USD may stay below parity this week,” said Joseph Capurso, head of international economics at CBA.

“Energy security fears will remain front and center this week as Gazprom closes its main pipeline to deliver gas to Western Europe for three days from August 31 to September 2,” he added. “There are fears that the gas supply will not be restored after the shutdown.”

Those fears saw natural gas futures in Europe jump 38% last week, further fueling the inflation bonfire.

The rising dollar and yields were a drag on gold, which was down to $1,725 ​​an ounce.

Oil prices rose on speculation that OPEC+ could cut production at a September 5 meeting.

Brent rose 58 cents to $101.57, while U.S. crude firmed 87 cents to $93.93 a barrel.