LONDON, May 19 — Heavy falls in European and Asian stock markets followed Wall Street’s worst day since mid-2020 today, as stark warnings from some of the world’s biggest retailers underscored just how hard inflation is biting.Bond markets rallied in the dive for safety and on bets that interest rate rises may get recalibrated, but it was the gloom striking down equities after Wednesday’s $25 billion wipeout in US retailer Target’s shares that dominated the action.Europe opened down 1.8 per cent, led by a 2.2 per cent fall in its retail sector, while scarlet red US futures and some sharp overnight drops in China tech firms put 1-1/2 year lows back in focus for MSCI all-country world."Target and Walmart coming out with disappointing numbers has really, really spooked people,” said Close Brothers Asset Management’s Chief Investment Officer Robert Alster."We are going to see a raft of downgrades to US GDP (forecasts) now... it really looks like we are running into a faster slowdown than we expected.”The S&P 500 had lost 4 per cent yesterday while the Nasdaq had fallen almost 5 per cent as interest-rate sensitive megacap stocks Amazon, Nvidia and Tesla dropped close to 7 per cent and while Apple tumbled 5.6 per cent.MSCI’s broadest index of Asia-Pacific shares ex-Japan then snapped four days of gains as it slumped 1.8 per cent, dragged down by a 1.65 per cent loss for Australia’s resource-heavy index, a 2.5 per cent drop in Hong Kong. Tokyo’s Nikkei shed 1.9 per cent too.Tech giants listed in Hong Kong were hit particularly hard, with the index falling nearly 4 per cent. China’s online behemoth Tencent sank more than 6 per cent after it reported no revenue growth in the first quarter, its worst performance since going public in 2004.China’s technology sector is still reeling from a year-long government crackdown and slowing economic prospects stemming from Beijing’s strict zero-Covid policy, even though soothing comments from Vice Premier Liu He to tech executives buoyed sentiment yesterday.Central focusThe focus remained on what central banks will now do as they walk the tightrope of trying to regain control of inflation, which is now at 40-year highs in some countries, without causing painful recessions.

Two US central bankers said they expect the Federal Reserve to downshift to a more measured pace of policy tightening after July, but in Europe markets were suddenly pricing in as many as four ECB hikes. It hasn’t raised interest rates for a decade.

However, while things haven’t reached the point of no return, they are seemingly heading in the direction of "out of control. That is probably the most worrying part for the market,” said Hebe Chen, market analyst at IG.

In the currency markets, the US dollar eased back 0.3 per cent against a basket of major currencies, after a 0.55 per cent jump overnight that ended a three-day losing streak.

The euro gained 0.4 per cent on the ECB rate rise view, while the Aussie dollar gained 0.8 per cent and New Zealand’s kiwi dollar bounced 0.6 per cent, helped by an easing of Shanghai’s Covid lockdown in China.

US Treasuries rallied overnight and were bright at 2.84 per cent in Europe where the risk-adverse mood also saw Germany’s 10-year bond yield - which moves inverse to price - fall back below the closely watched 1 per cent level.

Inflation worriers watched oil prices ease again too, as fears over slower economic growth outweighed lingering fears over tight global supplies.

Brent crude went from US$110.41 (RM486) to US$108.25 per barrel in London trading, while US crude dipped to US$108.78 a barrel and gold, which has fallen more than 12 per cent since March, clawed up to US$1,822 per ounce.— Reuters