Global shares hit two-month lows on Friday while US government bond yields remained near recent 16-year highs as investors bet on interest rates staying elevated for longer, with worries over China's shadow banking sector also a dampener.
The greenback was set for a fifth winning week, its longest winning streak in 15 months, underpinned by the prospect of borrowing costs remaining high or rising even further - yet with no sign of a hard landing for the U.S. economy to crimp corporate earnings.
Crude oil was set to snap a 7-week winning streak as China's slowing economic growth and possibility of more U.S. rate hikes hit sentiment.
The sour mood in markets extended to cryptoassets, with bitcoin hitting a fresh two month low.
Jason Da Silva, director, global investment strategy at Arbuthnot Latham, said stock markets were paying the price for bond yields soaring as economic data from the United States smash expectations, despite all the rate hikes so far.
The MSCI All Country stock index was down 0.3%, hitting its lowest since early June after falling 5.85% during August, though it remains 10.2% up for the year.
Ten-year U.S. Treasury yields eased 7 basis points to 4.2329%, after surging about 30 basis points this month alone to a 10-month top of 4.3280% and near its highest levels since 2007.
Euro zone government bond yields also eased on Friday as concerns about the global economy nudged investors into safe-haven government bonds.
Britain's 10-year bond yield had risen on Thursday to its highest since 2008 at around 4.76%.
"The bond yields are saying you are probably going to have to keep rates higher for longer, and if growth starts to really pick up again, we might need to tighten further and stock markets are not liking that," Da Silva said.
Minutes from the Federal Reserve this week showed most members of the rate-setting committee continued to see significant upside risks to inflation, suggesting more hikes are in the pipeline.
Da Silva said that a pullback in stocks after their strong gains earlier in the year was natural, and that investors should only be worried if there is a recession, but this was not going to happen anytime soon in the United States given the strong data.
The Fed and other top central banks gather for their annual confab in Jackson Hole, Wyoming next week, with investors set to scrutinise a speech from Fed Chair Jerome Powell on Aug. 25 for latest clues on potential rate hikes.
Markets are already scaling back rate cuts bets next year. S&P 500 futures and Nasdaq futures were slightly weaker.
China shadow banking
Investors were keeping a close eye on the liquidity crunch that appeared to be spreading to China's vast shadow banking sector, with Zhongzhi, a major Chinese asset manager, telling investors it needs to restructure its debt.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.9% to flirt with nine-month lows, bringing the total loss for the week to over 3% and marked the third straight week of declines for the index.
Chinese blue-chips dropped 1.2% and Hong Kong's Hang Seng Index slumped another 2%, heading for the biggest weekly losses in two months.
Technology shares plunged 3.6%, likely weighed by reports that electric-vehicle batteries and other car parts are under scrutiny as part of Washington's effort to stamp out U.S. links to forced labour in Chinese supply chains.
Shares of Chinese property developers listed in Hong Kong fell 2%, after China Evergrande filed for protection from creditors in a U.S. bankruptcy court.
"At the start of the year China's economy was powering ahead. But the picture has gradually worsened since, and now looks quite bleak," said Jonas Goltermann, deputy chief markets economist at Capital Economics.
Onshore yuan moved away from a nine-month trough after the central bank set the daily fixing much higher than expected to support the currency, with traders on edge for any more direct intervention by Beijing or state-owned banks.
Japan's Nikkei also lost 0.5%, heading for a weekly drop of 3.1%.
Data on Friday showed Japan's core inflation slowed in July, a result that is likely to support market wagers that the Bank of Japan is in no hurry to phase out monetary easing anytime soon.
The U.S. dollar recovered from an earlier dip and was standing tall near a two-month top at 103.42 against its major peers. It was up about 0.5% on the week.
The Japanese yen was trading at 145.34 against the dollar, having been hammered this week to a nine-month low of 146.56 per dollar as yield differentials between the U.S. and Japan widened. It, however, still neared levels that sparked an intervention by Japanese authorities late last year.
Oil prices were marginally lower. Brent crude futures gained 0.15% to $84.25 per barrel and U.S. West Texas Intermediate crude futures was up 0.3% at $80.62.
The gold price was 0.2% higher at $1,892 per ounce.
