Australia

Australian shares are set to plummet after US shares tumbled into bear market territory as investors braced for more aggressive action from the Federal Reserve to curb still-rising inflation.

ASX futures were down 183 points or 2.7% at 6631 as of 8.00am on Tuesday, pointing to a major selloff at the open in line with global equity and bond markets.

Investors continued to dump risk one trading day after fresh data showed US inflation continued to accelerate in May. The S&P 500 slumped 3.9% as 495 of its 500 components ended the day lower. The declines left the US stock benchmark down more than 20% from its January record, sending it into a bear market for the first time since 2020. The Dow Jones Industrial Average dropped 2.8%. The tech-heavy Nasdaq Composite declined 4.7%, off 33% from its November record.

Traders now expect the US federal funds rate to rise to 3.6% by year end, compared to the 2.9% priced in one week ago. Speculation is rising the central bank could deliver an extra large 0.75% rate increase following its meeting this week (Thursday AEST).

Meanwhile, a rout in cryptocurrencies highlighted investors' increasing unwillingness to hang on to their most speculative holdings. The price of bitcoin plunged below $23,000 before paring that loss to trade at 5 pm New York time, down 66% from its November high.

"We're definitely seeing a risk-off atmosphere, a flight to quality," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "In that environment, people need to raise cash."

Locally, the S&P/ASX 200 closed 1.25% lower at 6932.0 on Friday, falling to its heaviest weekly loss since April 2020 amid concerns about inflation globally.

All 11 sectors fell as the benchmark index followed a negative lead from US equities, which dropped after the European Central Bank outlined a plan to raise interest rates in July.

The property-trusts sector led losses, falling 2.9% amid worries over the impact of rising rates on real-estate markets.

Banks NAB, ANZ, Commonwealth and Westpac lost between 0.7% and 1.5%. Travel and retail stocks fell, while the energy sector, which has soared recently on higher wholesale prices, shed 1.6%. The ASX 200 lost 4.2% for the week.

In commodity markets, Brent crude oil edged up 0.15% to US$122.19 a barrel. Iron ore fell 3.5% to US$136.60. Gold declined 2.3% to US$1831.80.

In local bond markets on Friday the yield on Australian 2 Year government bonds popped to 2.71% while the 10 Year jumped to 3.83%. US bond markets plummeted as traders stepped up forecasts for how far the Federal Reserve will hike rates. The yield on 2 year Treasury notes, which are especially sensitive to changes in interest rates, soared to 3.35% and the yield on the 10 year US Treasury notes rose to 3.36%.

The Australian dollar slumped to 69.24 US cents, down from the previous close of 70.49 US cents. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies rose to 97.64 amid risk-off sentiment.

Asia

Chinese stocks finished mixed, as gains by auto companies were offset by losses among property developers. Demand in the auto industry is strengthening amid supportive government policies, and a sales recovery in 2H could drive the sector's share prices higher, Guotai Junan Securities says in a note. Great Wall Motor added 5.3%, Guangzhou Auto gained 3.9% and Chongqing Changan Auto jumped 8.9%. Among laggards, Poly Developments lost 4.5% after May contracted sales fell 36%, and Gemdale Corp. retreated 4.2%. Wuxi AppTec skidded 9.6% after news its controlling shareholder plans to reduce its stake. The Shanghai Composite Index fell 0.9% to 3255.55, the Shenzhen Composite Index ended flat and the ChiNext Price Index was 0.4% lower.

Hong Kong stocks ended the session sharply lower as Asian equities mostly tracked lower. The regional weakness followed a sell-down on Wall Street last Friday, when surprisingly high May consumer-price data from the US prompted investors to reassess how aggressive the Federal Reserve will have to be in raising interest rates to combat inflation. The benchmark Hang Seng Index fell 3.4% to settle at 21067.58. Tech stocks, whose valuations tend to particularly suffer amid higher interest rates, led losses. Alibaba dived 8.0% and Meituan fell 6.5%.

Japan's Nikkei Stock Average slid 3.0% to close at 26987.44 on renewed fears over aggressive Fed tightening. Last Friday's US CPI data slashed hopes that inflation had peaked and revived hawkish expectations that the Fed should get more aggressive if it wants to take control of inflation, says Swissquote Bank senior analyst Ipek Ozkardeskaya in an email. Losses on Nikkei were broad-based, with SMC Corp. declining 7.2%, SoftBank Group losing 6.85% and M3 Inc. down 6.75%.

Europe

European stocks tumbled amid a global selloff as stubborn inflation in the US reignited fears the Federal Reserve will raise interest rates further than expected to curb rising prices. Investors are also grappling with what is likely to be the first European Central Bank rate hike in over a decade come July.

The pan-European Stoxx Europe 600 fell 2.4% to its lowest closing value since March 2021. The German DAX dropped 2.4% and the French CAC 40 shed 2.7%.

London’s FTSE 100 closed down 1.53% on Monday after UK GDP contracted for the second month in a row. Investors are also awaiting policy decisions by the Federal Reserve and Bank of England later in the week in relation to in interest rates. Higher-than-expected US inflation data on Friday sparked speculation the Fed might raise interest rates by 75 basis points, more than the 50bp previously expected, at Wednesday's meeting, CMC Markets analyst Michael Hewson says in a note.

North America

The stock-market selloff deepened Monday, with the S&P 500 entering a bear market, as investors took another look at Friday's red-hot inflation data and liked it even less.

Faced with rising chances of aggressive monetary tightening by the Federal Reserve, investors broadly unloaded risk. The S&P 500 slumped 3.9% as 495 of its 500 components ended the day lower. The declines left the US stock benchmark down more than 20% from its January record, sending it into a bear market for the first time since 2020. The Dow Jones Industrial Average dropped 2.8%. The tech-heavy Nasdaq Composite declined 4.7%, off 33% from its November record.

Meanwhile, a rout in cryptocurrencies highlighted investors' increasing unwillingness to hang on to their most speculative holdings. The price of bitcoin plunged below $23,000 before paring that loss to trade at 5 pm New York time, down 66% from its November high.

The drop in cryptocurrencies accelerated Monday after interest-rate fears sparked a weekend selloff. Bitcoin, the biggest cryptocurrency, traded at 5 pm New York at $23,250.72, a drop of 15% from 24 hours earlier. Ethereum was down 16% from 24 hours earlier to about $1,243. Shares of Coinbase Global fell 11%, while Celsius Network said it was pausing all withdrawals, swaps between cryptocurrencies and transfers between accounts, citing "extreme market conditions."

Even rare bets that have worked in 2022 stumbled Monday. The energy segment, the only one of the S&P 500's 11 sectors in positive territory this year, fell 5.1%, a steeper decline than that of the broad index. The utilities group, the second-best performer in 2022, also lagged behind the market with a daily drop of 4.6%.

"We're definitely seeing a risk-off atmosphere, a flight to quality," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "In that environment, people need to raise cash."

Markets have swung wildly this year as investors scramble to decipher how rapidly the central bank will raise interest rates in an attempt to tame sky-high inflation. Rock-bottom rates and other stimulative policies helped keep the economy -- as well as markets -- afloat as the arrival of the Covid-19 pandemic idled businesses and threw people out of work.

Now, the Fed is trying to tame surging prices by unwinding that easy-money policy. The Fed will begin its latest two-day policy meeting Tuesday, and most investors believe that the central bank will announce Wednesday it is raising its benchmark interest rate by half a percentage point.

But expectations that the Fed will be forced to move even more aggressively this year have risen since Friday's inflation data, which showed US consumer prices climbed 8.6% year over year in May, the fastest such increase since 1981. The report jolted markets and intensified fears that the campaign of monetary tightening could tip the economy into a recession.

"If inflation is going higher, the Federal Reserve has no choice but to raise interest rates," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "The higher the Federal Reserve needs to raise interest rates, and the longer they need to keep raising interest rates, the more likely it is that we go into a recession."

On Monday, futures bets showed traders assigned a roughly 85% probability that the Fed will raise its benchmark short-term interest rate by at least 2.5 percentage points by the end of the year from its current range between 0.75% and 1%, according to CME Group. That would equate to at least a half-percentage-point rate increase at every Fed meeting this year. On Friday, traders placed the chances of that at 50%, according to CME Group.

"It seems as though inflation is staying for longer than expected," said Kiran Ganesh, a multiasset strategist at UBS. "People are now beginning to fear that the Fed will have to go further or faster in terms of interest rates."

Government bond yields surged Monday as investors worried that persistent inflation could prompt the Fed to raise rates higher and faster than had been expected. The yield on the benchmark 10-year US Treasury note rose to 3.371% Monday, its highest closing level since 2011, from 3.156% Friday. It was its largest one-day yield gain since March 2020.

US tech stocks, which soared throughout the pandemic, notched big declines. Apple shares fell 3.8%, while Amazon.com shares lost 5.5%. Chip maker Nvidia slid 7.8% and Tesla dropped 7.1%. Meta Platforms, the parent company of Facebook, lost 6.4%.

"This is what you call a bear market, where fear is taking place and pushing people out of the market and having people empty up portfolios and capitulate," said Todd Morgan, the chairman of Los Angeles-based Bel Air Investment Advisors.

Still, Mr. Morgan said developments in the next month or two could help damp inflationary pressures, such as lower gasoline demand after the summer and slowing demand for houses due to rising mortgage rates.

"We're in a brave new world right now. I don't think anyone can accurately predict inflation one year from now," Morgan Stanley CEO James Gorman said at a conference Monday.

"China opening up is a big deal, too," he said, as that would help ease supply-chain constraints. Figures last week showed Chinese exports to the rest of the world surged in May as Covid-19 restrictions eased, adding to signs of economic recovery there.