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Hong Kong - Asian stocks broke a two-day rising streak on Thursday after top US Federal Reserve officials kept the door open to a December interest rate hike, sending short-term US bond yields to 4-1/2-year highs and giving a boost to a resurgent dollar.
European stocks are set to start cautiously with spreadbetters expecting Britain's FTSE 100 to open flat, Germany's DAX to rise 0.13% and France's CAC 40 to open flat.
A US interest rate hike, ordinarily a sign of a healthy global economy, would now come at the worst possible time for export-oriented Asian countries which are grappling with the twin effects of a slowing China and shrinking global trade.
MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.4%, led by a 1% fall in Australian shares. While it has risen 12% since end-September, it is still down 10% so far this year.
"Emerging markets are facing some stiff headwinds particularly in the form of a historic China transition away from manufacturing-led growth and an entrenched slowdown in global trade," said Jeremy Lawson, chief economist at Standard Life Investments.
In fresh signs that Asian countries were feeling the heat, central banks from Australia to Thailand voiced caution at their scheduled policy meetings this week while retail sales in Hong Kong fell for a seventh consecutive month.
In her first public comments since the Fed's meeting last week, Federal Reserve Chair Yellen said the US was ready for higher interest rates if upcoming economic data justified them.
"If the incoming information supports that expectation then our statement indicates that December would be a live possibility," she said. In later comments, New York Fed President William Dudley agreed with Yellen.
The Fed chief's measured optimism was in direct contrast with disappointing earnings for struggling businesses in Asia.
So far, September quarter net income for companies in Asia-ex Japan has missed consensus estimates by 6.5%, according to Morgan Stanley while Japan, a relatively bright spot so far in Asia, has also faltered.
Tomoaki Shishido, fixed-income strategist at Nomura Securities, said: "Her comments confirmed that a rate hike in December is the Fed's base case scenario."
Stocks within the region were having a mixed day with Australia, India and Korea struggling to keep their heads above water while Chinese stocks were the clear outperformers.
US data on Wednesday supported Yellen's guarded optimism, with private employers hiring steadily in October and a jump in new orders buoying activity in the services sector.
The US bond market reacted promptly, with the policy-sensitive US two-year notes yield rising to 0.85% in Asian trade on Thursday, its highest level since April 2011. It has gained nearly 30 bps since early October.
The near-term Federal fund futures contract fell to the lowest levels in a month or longer, suggesting the market is pricing more than a 50% chance of a rate hike at the Fed's next meeting on December 15 to 16.
The spectre of higher US rates gave fresh legs to the dollar which has already risen more than 4% against a basket of its peers since mid-October, stifling demand for commodities and precious metals.
The euro shed 0.9% on Wednesday and hit a 3-1/2-month low of $1.08435. It last traded at $1.0862.
The yen also weakened to 121.42 to the dollar, its lowest since August 31 and last stood at 121.58.
Gold slipped to a one-month low of $1,106.70 per ounce while silver dropped to as low as $15.06 per ounce, also a one-month low.
Oil prices erased their gains so far this week, falling 4% on Wednesday on tumbling gasoline prices and rising US crude inventories.
Brent crude futures dropped to $48.91 per barrel from Tuesday's three-week high of $50.91.
Stagnant oil prices are hurting shares of oil-producing countries, with Saudi Arabian shares hitting a near three-year low on Wednesday before managing a small rebound.
