Asia shares decline; UK bonds face a make-or-break day

As investors braced for an acute tightening of global financial conditions and the related dangers of recession, Asian stock markets dropped on Monday.

Now that the Bank of England's (BoE) emergency bond-buying frenzy has ceased, financial stability concerns have been added to the toxic mix.

Prime Minister Liz Truss's decision to fire her finance minister may soothe the markets, but her own future is dubious, as media sources indicate Conservative lawmakers will attempt to replace her this week.

Andrew Bailey, governor of the Bank of England, issued a warning over the weekend that interest rates may need to increase by a bigger amount than anticipated.

In a note, ANZ analysts noted that the Bank of England was performing emergency asset purchases that are theoretically comparable to quantitative easing (QE), while swiftly rising the policy rate.

The performance of the market on Monday will be a litmus test not only for the survival of Truss' low-tax policy, but also for her political future.

At $1.1240, the pound sterling was quoted 0.6% higher, but Asia's markets were thin and lacked liquidity.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5% and reverted to last week's two-and-a-half-year market low. The Nikkei was down 1.1%, while the Kospi was down 1.5%.

Following Friday's precipitous loss, S&P 500 futures inched up 0.5%, while Nasdaq futures rose 0.4%.

While the S&P is down a staggering 25% from it's all-time high, BofA analyst Jared Woodard warned that the slide was not over, as the world was changing from two decades of 2% inflation to 5% inflation.

"$70 trillion in 'new' tech, growth, and government bond assets valued at 2% are vulnerable to these secular transitions as 'old' industries such as oil and materials increase," he wrote in a note.

The best way for investors to diversify is to sell their 60/40 proxy positions and purchase scarce commodities such as oil, food, and power.

INTERVENTION WATCH

As a result of last week's explosive inflation report, the markets anticipate that the Federal Reserve will hike interest rates by 75 basis points next month, and most likely by the same amount in December.

Numerous Fed policymakers will speak this week, so there will be plenty opportunity for hawkish headlines. Among others, Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), and Johnson & Johnson (NYSE:JNJ) continue to report earnings.

The Communist Party Congress of China is expected to grant President Xi Jinping a third term, while there may be a change in top economic positions as incumbents reach retirement age or term limits.

As investors predict U.S. interest rates to peak at approximately 5%, the dollar continues to reign supreme on currency markets.

As the Bank of Japan maintains its ultra-loose monetary policy, the yen has been hit particularly hard, and policymakers refrained from interfering last week as the dollar rocketed through the 148,000 threshold to 32-year highs.

On Monday morning, the dollar was up at 148.62 yen and heading toward the next aim of 150.00 yen.

Having performed more solidly over the previous week, the euro remained constant at $0.9733, while the U.S. dollar index dipped to 113.20.

Gold remained unchanged at $1,646 per ounce due to the strengthening of the global currency and bond yields.

Fears of a demand slowdown eclipsed OPEC's efforts to limit output, prompting oil prices to drop by over 6 percent in the preceding week.

Brent rose 64 cents to $92.27 per barrel, and U.S. crude rose 55 cents to $81.66 per barrel.