Asian shares were languishing at two-year lows on Wednesday (12/10/2022), as a stronger dollar, volatility in the UK bond market and upcoming US inflation data set the stage for a wild session on Wall Street and further volatility for investors.

Sterling has slumped for a second week, after Bank of England Governor Andrew Bailey on Tuesday reiterated that the central bank would end its emergency bond-buying program this week and told pension fund managers to complete a rebalancing of their positions.

"In the UK situation - they have high inflation, and under the Kwarteng fiscal policy package they are actually going to push it even higher," said Damien Boey, head of macro strategy at Barrenjoey in Sydney. "So you are actually forcing the Bank of England to do more work than it would otherwise - which is why the risk premium in the gold market is going up quite a bit."

Meanwhile in Japan, the dollar went on a rampage, surging above 146 yen for the first time since 1998, prompting authorities in Tokyo to promise necessary foreign exchange market action if necessary. The Nikkei stock average (.N225) fell 0.18%. The UK financial turmoil combined with a surge in U.S. dollar strength to send sterling to a two-week low of 1.0949, while the risk-sensitive Australian dollar fell to $0.6247, its lowest since April 2020.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.87%, while Seoul's KOSPI (.KS11) fell 0.41% and Australia's resources index (.AXJO) rose 0.05%. China's CSI300 (.CSI300) fell 0.96% in early trade and Hong Kong's Hang Seng Index fell 1.94%.

There was some good news elsewhere, however. The International Monetary Fund cut its 2023 global growth forecast from 2.9% to 2.7%, warning that inflationary pressures, war-fueled energy and food crises, and higher interest rates could tip the world into recession and financial market instability.

The BOE warned British pension funds and other investors to get their houses in order on Friday, when it will end a massive bond-buying program aimed at calming the roller-coaster ride seen by gold and sterling in recent days.

The warning, ahead of U.S. inflation data on Wednesday and Thursday that is expected to keep the Fed on an aggressive interest rate hike path, sent stocks lower on Wall Street.

Overnight, the S&P 500 and Nasdaq Composite fell 0.65% and 1.10%, respectively, although the Dow Jones Industrial Average (.DJI) managed to close up 0.12%. The benchmark 10-year note was at 3.9511%, after opening at 3.9510%.

Brent crude futures fell 51 cents, or 0.5%, to $93.78 a barrel by 0033 GMT. U.S. West Texas Intermediate crude was at $88.66 a barrel, down 69 cents, or 0.8%. That was the third straight decline as investors worried about falling fuel demand and tightening COVID-19 restrictions in China. Spot gold fell 0.2% to $1,661.50 an ounce.

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