Stocks dive on surging inflation, Ukraine risks; China markets sell-off

Asian shares extended a global slump on Friday after the fastest U.S. inflation in four decades and a hawkish European Central Bank (ECB) bolstered expectations for more aggressive rate hikes, hammering sentiment already stung by the Ukraine war.

Sellers swarmed Chinese equity markets after U.S.-listed Chinese stocks tumbled following the naming of the first Chinese firms to be potentially de-listed in the United States.

Risk appetite suffered more broadly as investors braced for faster tightening of monetary conditions after data on Thursday showed a 7.9% annualised jump in U.S. consumer inflation in February, the largest increase in 40 years.

In morning trade in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan skidded 1.7%, as a retreat on Wall Street spilled over on many of the region's country benchmarks, which turned deeply red.

Hong Kong's Hang Seng index slumped 3.5%, with the shares of Yum China and four other firms taking a beating after the companies were embroiled in an auditing dispute between Beijing and Washington.

The sell-off in Chinese shares came even as the country's securities regulator said on Friday it was confident it will reach an agreement with U.S. counterparts on securities supervision.

Outside Hong Kong, the losses in Chinese shares were smaller, with the country's blue-chip index down 1.3%.

Elsewhere, Japan's Nikkei lost 2.4%, while South Korean shares shed 1.0% and Australian shares dropped 0.9%.

Sentiment was also not helped after talks between Ukraine and Russia's foreign ministers on Thursday brought little respite in the conflict between the two countries.

"Disappointingly, although widely expected, Russia-Ukraine talks failed to yield a positive outcome," said Rodrigo Catril, a senior foreign exchange strategist at NAB in Sydney.

Analysts believe Russia's war against Ukraine will push up inflation around the world further as it drives up prices of oil and other commodities.

Goldman Sachs downgraded its U.S. real gross domestic product growth forecast for 2022 to +1.75% from +2.0% previously to reflect higher oil prices and other drags on growth related to the war in Ukraine.

While markets widely expect the U.S. Federal Reserve to raise the Fed funds target rate by 25 basis points at the conclusion of next week's monetary policy meeting, the CPI data suggested the FOMC could move "more aggressively" to curb inflation, as promised by Fed Chair Jerome Powell last week.

The ECB said on Thursday it will stop bond-buying in the third quarter, opening the door for interest rate hikes as surging inflation outweighs worries about the hit to economic growth from Russia's invasion of Ukraine.

"The ECB meeting was clearly more hawkish than expected," said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

"We see 11 basis points of hikes priced into EU rates by the July ECB meeting."

In the currency market, the euro was 0.13% higher at $1.0997, as the hawkish tone from the ECB failed to boost momentum for the single currency substantially.

"The ECB gave more clarity to their stimulus exit plans, but it's unlikely to give euro a sustained lift, not while the Russia-Ukraine conflict is ongoing," said analysts at Westpac in a morning note.

The yen traded at 116.25 per dollar after briefly easing to a five-year low of 116.39 per dollar.

The dollar index held steady at 98.491, below a more than 1-1/2 year high of 99.418 hit on Monday.

In the bond market, yields on 10-year U.S. Treasury notes were at 1.9671%, while Japan's 10-year government bond yield was at 0.185%.

In commodity markets, U.S. crude was down 0.4% at $105.6 a barrel. Brent crude was 1.0% lower at $108.15 per barrel.

Gold was flat. Spot gold was traded at $1,995.65 per ounce.

 

(Reporting by Daniel Leussink in Tokyo; Editing by Shri Navaratnam)