Global shares fell on Monday after a series of explosions in the Ukrainian capital and renewed concern about the economic outlook sent investors into safe-haven assets such as the dollar and bonds.
Any belief that the Federal Reserve will shift to a softer stance towards monetary policy was extinguished on Friday by data that showed unemployment fell in September, signalling a labour market that is not suffering from red-hot inflation. The dollar held firm against a basket of currencies, while a number of market-based measures of investor risk nervousness showed another increase.
Russian missile strikes during Monday's rush hour across Ukraine killed at least five people in the capital Kyiv, in apparent revenge bombings after President Vladimir Putin declared an explosion on the bridge to Crimea to be a terrorist attack.
"I had wondered if markets were looking at the situation in Ukraine and thinking this was moving us toward an end - which was what the first reaction was to the progress that the Ukrainian army had made in the summer. That reaction is no longer happening and this is clearly seen as just an increase in tension, rather than the end of anything," Societe Generale head of currency strategy Kit Juckes said.
"We’ve got geopolitical tensions and we’re still on track towards tighter monetary policy in the States and the concern is still by the time they finished tightening, will they have tightened too much and leave the economy looking pretty vulnerable?," he added.
The MSCI All-World index (.MIWD00000PUS) fell 0.5% in early trading in Europe, down for a fourth day in a row. The pan-European STOXX 600 (.STOXX) fell 0.5% to its lowest in a week, while Germany's DAX (.GDAXI) lost 0.1% and the FTSE 100 (.FTSE) fell 0.7%, making it one of the weaker performing indices.
Wall Street sank on Friday after an upbeat payrolls report cemented expectations for another large rate hike. read more
Futures imply a more than 80% chance of rates rising by 75 basis points next month, while the European Central Bank (ECB) is expected to match that and the Bank of England to hike by at least 100 basis points. ,
U.S. consumer inflation is expected to have moderated to an annual 8.1%, but the core measure is forecast to have accelerated to 6.5% from 6.3%. The U.S. CPI data is due on Thursday.
"We are in the midst of the largest and most synchronized tightening of global monetary policy in more than three decades," said Bruce Kasman head of economic research at JPMorgan, who expects hikes of 75 basis points from all three of the central banks.
"The September CPI report should show a moderation in goods prices that is a likely harbinger of a broader slowing in core inflation," he said. "But the Fed will not be responsive to a whisper of inflation moderation as long as labour markets shout tightness."
Minutes of the Fed's last policy meeting are also out this week and are likely to sound hawkish given how many policy makers lifted their dot plot forecasts for rates.
Although U.S. inflation and the Fed's response to it remain front and centre of investors' minds, euro zone government bonds got a boost from the pickup in investor risk aversion.
German 10-year Bund yields , which serve as the region's benchmark, eased 3 basis points to 2.162%, while the more sensitive 2-year Schatz fell 8 bps to 1.787%.
Adding another note of caution was 2% drop in Chinese blue-chip stocks (.CSI300), following a survey that showed the first contraction in services activity in four months.
Corporate earnings also kick off on Friday, with JPMorgan, Citi, Wells Fargo and Morgan Stanley reporting results.
"Consensus expects 3% year/year EPS growth, 13% sales growth, and 75 bp margin contraction to 11.8%," analysts at Goldman Sachs said in a note. "Excluding Energy, EPS is expected to fall by 3% and margins to contract by 132 bp."
"We expect smaller positive surprises in 3Q compared with 1H 2022 and negative revisions to 4Q and 2023 consensus estimates."
The dollar index rose 0.3% to 113.14 , leaving the euro down 0.4% at $0.9697 and the yen flat at 145.45, a whisker away from the recent 24-year high of 145.90 that prompted Japanese intervention.
Sterling lost 0.3% to $1.10625 , after the Bank of England announced a surprise decision to shore up the gilt market ahead of the end of an emergency bond-buying programme on Friday. [nL8N31B0VI]
Oil fell for the first time in a week, as investors took profit on last week's 11% rally after a deal on supply reductions by OPEC+.
Brent fell 0.7% to $97.26 a barrel, while U.S. crude dropped 0.6% to $92.08 a barrel.
