Most Asian markets fell Tuesday following a Wall Street slump as soaring oil prices put further upward pressure on inflation while a standoff in Washington over raising the country's borrowing limit fuelled fears of a catastrophic US debt default.
Investors were nervously monitoring developments in the crisis surrounding troubled property giant China Evergrande, which has raised warnings about contagion in the world's number two economy and possibly beyond.
A decision Monday by OPEC and other major producers not to increase their output by more than previously agreed -- despite tightening supplies and rising demand -- sent crude prices rocketing, with WTI hitting a seven-year high and Brent a three-year peak. Both main contracts rose Tuesday.
The announcement fanned expectations that inflation, already sitting at multi-year highs, will spike further, putting pressure on central banks to taper their ultra-loose monetary policies sooner than flagged with interest rates to then rise.
And some analysts are warning of a period of stagflation, in which prices surge while economic growth stalls.
Crude markets have come under pressure as the global economy emerges from the pandemic, pushing up demand for travel, among other things, while the approaching northern hemisphere winter has seen gas prices jump, which has in turn led companies to switch to oil.
"Prices are likely to remain supported in the final quarter, with gas-to-oil switching and pricey coal adding to oil consumption," Will Sungchil Yun, an analyst at VI Investment Corp, said.
All three main indexes on Wall Street ended deep in the red, led by the Nasdaq, as tech firms took a beating owing to their susceptibility to higher interest rates.
- US debt fears build -
And the losses continued in Asia, with Tokyo briefly sinking as much as 3.5 percent before paring some of the losses. Sydney, Seoul, Singapore, Wellington and Jakarta also fell.
However, Hong Kong reversed early losses following Monday's sharp drop, while Taipei, Manila, Mumbai and Bangkok edged up. Shanghai was closed for a holiday.
London, Frankfurt and Paris rose after opening.
"It looks like we are in for a bit of a chop-fest in financial markets for the rest of the week, until Friday’s (US jobs data) gives the street some clarity on the Federal Reserve taper," said OANDA's Jeffrey Halley.
And Emily Weis at State Street told Bloomberg Television: "We think there is going to be more volatility in these markets.
"It's not going to be the same sort of 'risk assets always go up over time' story that maybe happened in the rebound from Covid."
Investors are growing increasingly nervous about US lawmakers bickering over lifting the debt ceiling with around two weeks of cash left, leaving the country on the brink of a historic debt default that several experts including Treasury Secretary Janet Yellen warned would cause a financial crisis.
With Republicans refusing to agree to more borrowing, calling Democrats spendthrift, President Joe Biden on Monday called his opponents "reckless and dangerous".
Democratic infighting also continues to hold up progress on his multi-trillion-dollar infrastructure and social care bills.
The crisis in China's property sector remained on investors' minds, with news that developer Fantasia Holdings was in trouble after failing to make a payment to bondholders adding to concerns about the broader impact from the woes at indebted Evergrande.
With the real estate colossus teetering, there are concerns that its collapse would reverberate through the world's number two economy, with the property industry a major driver of growth.
There was no word from the firm Tuesday, a day after it suspended trading in its Hong Kong shares pending an announcement on a "major transaction".
The halt came as reports said Hong Kong real estate firm Hopson Development Holdings planned to buy a 51 percent stake in Evergrande's property services arm.
- Key figures around 0720 GMT -
Tokyo - Nikkei 225: DOWN 2.2 percent at 27,822.12 (close)
Hong Kong - Hang Seng Index: UP 0.3 percent at 24,098.00
London - FTSE 100: UP 0.1 percent at 7,020.20
Shanghai - Composite: Closed for a holiday
West Texas Intermediate: UP 0.1 percent at $77.70 per barrel
Brent North Sea crude: UP 0.2 percent at $81.42 per barrel
Dollar/yen: UP at 111.19 yen from 110.93 yen at 2050 GMT
Euro/dollar: DOWN at $1.1600 from $1.1623
Pound/dollar: DOWN at $1.3605 from $1.3608
Euro/pound: DOWN at 85.27 pence from 85.37 pence
New York - Dow: DOWN 0.9 percent at 34,002.92 (close)