MSCI's broadest index of Asia-Pacific shares outside Japan dropped 2.8 per cent to one-month low, which would be its biggest fall in more than a year and a half, a day after it had fallen 1.6 per cent. "But the tide seems to have changed", said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. But during Tuesday's early hours, USA futures pared some of their sharp declines.
The Dow Jones Industrial Average fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite dropped 273.42 points, or 3.78 percent, to 6,967.53.
The original trigger for the sell-off was a sharp rise in USA bond yields late last week after data showed US wages increasing at the fastest pace since 2009. "That could be painful for markets that have been propped up by central banks" stimulus for many years. Janet Yellen, who just stepped down as Fed chief, told PBS on Friday that she still believes "asset valuations generally are elevated".
Benchmark US 10-year note yields surged to 2.885 per cent overnight, the highest since January 2014, following data Friday that showed hourly wages rose in January.
Japan's Nikkei sank 2.3 per cent, while Australia's main index lost 1.3 per cent and Chinese blue chips slid 0.7 per cent. The three major indexes capped their worst weekly losses in two years, after closing at record highs the previous week. That left some popular exchange-traded products that investors use to benefit from calm market conditions facing potential liquidation. "People are dealing with the shock of seeing real inflation for the first time in a while", said Bruce McCain, chief investment strategist at Key Private Bank. "I'd also be avoiding stocks where dividend yields aren't backed up by strong free cash flow and a solid balance sheet", he added.
"Markets haven't really kicked off yet", McKenna said.
Fed fund futures are now pricing in only two rate hikes this year. And if it doesn't, long-dated bonds will be sold off on worries about inflation. Either way, that is going to slow down the economy. Besides the fear of faster inflation and interest-rate increases, more robust wage gains could eat into record-high corporate profits.
MARKET INSIGHT: "We've seen a sharp increase in USA bond yields over the last week after the Federal Reserve released a more hawkish than expected statement (on Wednesday), alongside its monetary policy decision, and the jobs data reported a significant increase in earnings", said Craig Erlam, senior market analyst at OANDA in London.
Any rally in the United States dollar is considered a negative for commodities priced in the currency, with the Thomson Reuters CRB index down 0.5 percent.
Bitcoin also tumbled, hitting a 12-week low of $6,600. That represented a 67.5 percent fall from its record high of $19,666, touched on December 17. Higher bond yields make it more expensive for companies to borrow and also bonds more attractive to investors than stocks.
Wall Street futures offer a chink of light as they turned higher but commodities suffered too, with oil and metals all tumbling backwards as what had been one of their best starts to a year also soured rapidly.
US stock futures were also pointing lower, with the Dow expected to open down about 0.6%. It last stood at $67.02.
U.S. WTI crude oil futures, caught up in the overall risk-off sentiment, -0.6% at $65.07/bbl.
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