By Marc Jones
LONDON (Reuters) - Nagging recession and interest rate worries had Europe's markets spluttering on Thursday, and the pound started to sag as Britain looked to put last month's disastrous fiscal experiment behind it with an austere-looking budget.
Trading got off to a choppy start as optimism about Siemens' earnings and that the European Central Bank might slow its rate hikes gave way to the selling that dogged Wall Street and Asia overnight. [.N][.SS][.T]
That was driven by renewed Fed policymaker talk that rates could shoot up further. It meant the dollar was fractionally higher after a recent 7% slump, though Europe's lower government debt yields suggested the bond markets were largely indifferent.
Sterling went from $1.193 to $1.1877 against the greenback in early trading in London ahead of an 1130 GMT budget plan from the country's new finance minister Jeremy Hunt.
He and Prime Minister Rishi Sunak hope it will restore confidence after former PM Liz Truss' unfunded tax cut plans caused widespread panic, sent the pound to an all-time low and forced Truss to quit after just 50 days in charge.
DoubleLine portfolio manager Bill Campbell said the pound's rebound over the last month meant the budget's likely spending cuts were probably already priced in, though and Britain's experience may well be mirrored elsewhere, especially with recessions looming and an ongoing energy crisis.
"The market has basically told the UK government that it is not gong to accept anything too aggressive on the fiscal stimulus front," Campbell said.
"It seems like we are moving into a fairly risky environment," he added, referring to likelihood that EU countries will try to frontload their borrowings next year. "I think it's highly likely that we could see some repeats of what happened in the UK".
Overnight in Asia grim signals from Micron Technology about excess inventories and sluggish demand sent chipmaker stocks sprawling.
On Wall Street, stronger-than-expected U.S. retail sales had suggested the Federal Reserve was unlikely to relax its battle with inflation.
That fuelled concerns about the economic outlook, with the U.S. Treasury yield curve remaining deeply inverted in Tokyo trading and suggesting that investors are braced for recession.
Hong Kong's Hang Seng Index fell 1.15%, with its tech stocks slipping more than 4% at one point. Mainland Chinese shares also declined, with blue chips there falling 0.5% having ripped 10% higher this month.
Japan's Nikkei lost 0.35% and South Korea's Kospi dropped 1.4%, each led by declines in heavyweight chip players.
Overnight, the Philadelphia SE Semiconductor Index slumped 4.3% after Micron said it would reduce memory chip supply and make more cuts to its capital spending plan.
The tech-heavy Nasdaq slumped 1.5% while the S&P 500 slid 0.8%.
However, e-mini futures indicated some respite at the reopen, pointing to barely any movement on the Nasdaq or the S&P.
Traders will also scrutinise speeches from Fed officials on Thursday for hints about rate hikes. Regional Fed Presidents Raphael Bostic, Loretta Mester and Neel Kashkari are all due to speak.
Hawkish remarks from Fed officials overnight added to doubts about a shift in policy, with San Francisco Fed President Mary Daly - until recently one of the most dovish officials - saying a pause was off the table.
The dollar fell 0.2% against the Japanese yen on Thursday to 139.28 as it continued to trade around its lowest level for three months. It plunged 3.7% on Thursday last week when U.S. consumer inflation data for October came in lower than expected.
The euro sank 0.14% too, while the risk-sensitive Aussie dollar slipped 0.4%. and China's yuan weakened 0.35% to 7.126 per dollar as new COVID cases caused concerns that officials could order more lockdowns.
Money markets give 93% odds that the Fed will slow to a half-point rate increase on Dec. 14, with a 7% probability of another 75 basis point increase. Traders still see the terminal rate close to 5% by next summer, up from the current policy rate of 3.75-4%.
"Fed commentary, like the resilient spending numbers, gave little succour for anyone looking for an imminent pivot," with caution permeating markets as a result, Ted Nugent, an economist at National Australia Bank, wrote in a client note.
U.S. 10-year Treasury yields recovered modestly from a six-week low at 3.671% hit overnight in Tokyo trading, last standing at about 3.72%, while the two-year yield consolidated near its lowest level since Oct. 28 around 4.37%.
Gold slid 0.6% to about $1,763 an ounce against a firmer dollar.
Crude oil steadied in Europe after settling more than a dollar lower overnight, following the resumption of Russian oil shipments via the Druzhba pipeline to Hungary and as rising COVID-19 cases in China weighed on sentiment. [O/R]
Brent crude futures were last at $92.30 a barrel have slipped below $92 overnight, while U.S. West Texas Intermediate (WTI) crude hovered at $84.85 a barrel.
(Additional reporting by Kevin Buckland in Tokyo; editing by Barbara Lewis)