A man on a bicycle stands in front of an electronic board showing the Shanghai stock index, Nikkei share price index and Dow Jones Industrial Average outside a brokerage in Tokyo.
SYDNEY Reuters -- Asian share markets fell on Wednesday as surging borrowing costs fed fears of a global recession, spooking investors into the arms of the safe-haven dollar and driving the Chinese yuan to record lows.
As selling swept across emerging markets, the broadest index of Asia-Pacific shares outside Japan fell 1.7% to its lowest since April 2020.
After a steady start, S&P 500 futures fell 0.8%, while Nasdaq futures fell 1.0%. EUROSTOXX 50 futures fell 0.8%, while FTSE futures lost 0.9%.
The central banks in advanced economies will make the current tightening cycle the most aggressive in three decades, said Jennifer McKeown, head of global economics at Capital Economics. It may be necessary to tame inflation, but it will come at a significant economic cost. We think that the next year will look like a global recession, feel like a global recession, and maybe even quack like one, so that's what we're calling it. The collapse in sterling and UK bond prices has caused investors to sell other assets to cover their losses.
The chief economist at the Bank of England said that large unfunded tax cuts would require a significant policy response, and could undermine the government's fiscal credibility, as well as add to the risk of higher interest rates.
George Saravelos, Global Head of FX Strategy at Deutsche Bank, said investors wanted more to finance the country's deficits, including a 200 basis-point rate hike by November and a terminal rate of 6%.
The market is now demanding a level of risk premium to stabilize the currency, according to Saravelos. If this isn't delivered, it risks further currency weakening, further imported inflation, and further tightening, a vicious cycle. The bounce from Monday's record trough of $1.0327 was short of the £1.1300 level held before last week's UK Budget, as the pound was under fire again at $1.0660.
Yields on British 10 year gilts have risen a staggering 119 basis points in just four sessions to reach 4.50%, the sharpest move since 1979 on the British 10 year gilts. The safe-haven dollar rose to a fresh 20 year peak of 114.520 against a basket of currencies, as a result of the rout in sterling.
The dollar went up to 144.74 yen, testing the resolve of the Japanese authorities to protect the 145.00 level after last week's intervention.
The euro fell to $0.9552 and back to the two-decade low of $0.9528 last week. The dollar was at a record high on the Chinese yuan at 7.2088, having risen for eight consecutive sessions.
The rise of the dollar has added to the risks that countries will have to lift interest rates and undermine growth, which adds to the mounting pressure on emerging market currencies.
After hitting lows not seen since April 2020, the surge of the dollar and bond yields has resulted in a drag on gold, which was hovering at $1,624 an ounce. GOL Oil prices fell again as crude storage builds and the strong dollar offset support from U.S. production cuts caused by Hurricane Ian. O R Brent fell $1.02 to $85.25 a barrel, while U.S. crude fell 93 cents to $77.57 per barrel.