LONDON: Global shares tumbled on Monday, after a run of upbeat economic data suggested interest rates will have to rise further and stay higher for longer, while a stronger dollar and political turbulence hit risk-linked assets.
Last week's blockbuster U.S. jobs report sent investors scurrying to load up on dollars to the detriment of emerging market assets and lower-yielding currencies like the yen.
Government bonds, which usually perform well when there is a dash for safe havens, have come under intense pressure, sending 10-year Treasury yields towards one-month highs.
The U.S. military said on Sunday it is searching for remnants of the suspected Chinese surveillance balloon it shot down a day earlier, while Beijing on Monday urged Washington not to escalate matters.
Turkey's under-pressure lira hit record lows after a powerful earthquake struck Turkey and Syria on Monday, killing over 500 people. The currency sank after data last week showed a worryingly large monthly rise in consumer inflation.
Friday's U.S. data showed 517,000 jobs were created in January, well above expectations for 185,000, while revisions for 2022 figures led to nonfarm payrolls increasing by 586,000 for the year. Deutsche Bank strategist Jim Reid called the report "astonishing".
By Monday, the dollar had touched a three-week high of 132.60 against the lower-yielding yen following reports the Japanese government had offered the job of central bank governor to current deputy Masayoshi Amamiya, viewed as less of a monetary policy hawk than his predecessor.
The dollar was last up 0.5% on the day at 131.84, keeping its index steady at 103.11, having jumped 1.2% on Friday. The euro fell 0.1% to $1.0787, while sterling was flat at $1.2063.
The MSCI All-World share index was down 0.5% on the day, driven in part by a 0.7% fall in European blue-chips as the STOXX 600 came under pressure.
The drama over the balloon, which Beijing reiterated was a civilian airship that accidentally strayed into U.S. airspace, has further strained already-tense relations and led Washington to cancel a planned visit to Beijing by Secretary of State Antony Blinken.
Chinese equities fell on Monday, while the offshore yuan touched a one-month low against the dollar. It has fallen by almost 2% in the space of three days.
"Undoubtedly, the incident is a negative headline for the market," said Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management. "The strong U.S. jobs report also cooled the fever of 'rate pivot' perceptions, leading to a surging dollar and a declining yuan."
Deutsche Bank's Reid said diplomatic tensions between the two countries would be worth watching this week. "We will see if there is any retaliation and/or how strong the rhetoric is."
S&P 500 futures and Nasdaq futures fell between 0.5-0.7% after January's payrolls report saw investors price in the risk of more hikes from the Federal Reserve, and less chance of cuts later in the year.
The dollar's strength also washed through emerging markets.
The lira bore much of the brunt of the risk-off mood, falling to a record low of 18.85 to the dollar, while the Thai baht posted its biggest one-day fall against the U.S. currency in over 20 years.
"The tragic events with southern part of Turkey being hit by powerful earthquake is source of additional uncertainty ahead of crucial elections that most likely are going to be held in May," Piotr Matys, senior FX analyst at In Touch Capital Markets, said.
"More importantly, the U.S. payrolls published last Friday indicated that the Fed is likely to remain in a tightening mode for longer then the markets currently anticipate at a time when President Erdogan strongly indicated he expects the Turkish central bank to cut interest rates," he said.
CENTRAL BANKER DELUGE
A host of Fed officials are set to speak this week, led by Chair Jerome Powell on Tuesday, and the tone could be hawkish. European Central Bank and Bank of England policymakers will also be making appearances.
Futures are almost fully priced for a quarter point U.S. rate rise in March, and likely another in May, leaving the peak at 5.0% from 4.9% ahead of the jobs data.
Oil futures rose on Monday, having lost 3% post-payrolls. Brent edged up 0.9% to $80.67 a barrel, while U.S. crude gained 0.6% to trade at $73.86 a barrel.
An energy official told Reuters on Monday there had been no damage to two of Turkey's key oil pipelines and flows were continuing after the earthquake. - Reuters