By Swati Pandey
SYDNEY (Reuters) – Asian stocks skidded on Monday as fears of faster rate hikes in the United States and uncertainty around the Sino-U.S. trade war deterred investment in riskier assets, while sterling briefly jumped to a two-week high on hopes of an orderly Brexit.
Markets are expected to be skittish ahead of U.S. congressional midterm elections on Tuesday.
Opinion polls show a strong chance that the Democratic Party could win control of the House of Representatives after two years of wielding no practical political power in Washington, with President Donald Trump's Republican Party likely to hold the Senate.
Spreadbetters point to a subdued start for Europe with both London's FTSE (FTSE) and Germany Dax (GDAXI) seen opening lower.
U.S. stock futures slipped 0.3 percent (ESc1) (1YMc1) after Wall Street closed lower on Friday amid concerns a trade deal between the United States and China may not be struck soon.
"We expect U.S.-China trade tensions to get worse before they get better," Citi analysts said in a note.
"Although trade growth has held steady, concerns are rising in business surveys," they added.
"Equity markets do not seem to be fully incorporating the risks of an escalation of tensions yet, which could have an effect on investment, sentiment, inflation, and growth."
MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) lost 1.4 percent on Monday, slipping back towards last week's 1-1/2 year trough of 505.61 points.
Japan's Nikkei (N225) stumbled 1.6 percent while South Korea's KOSPI index (KS11) fell 1.4 percent.
Chinese shares opened in the red with blue-chip stocks (CSI300) off 1.2 percent as President Xi Jinping acknowledged conditions abroad had created some challenges for the Chinese economy.
Xi, however, promised to lower import tariffs and continue to broaden market access.
Also clouding the outlook for world shares is the prospect of even tighter monetary policy in the United States, given robust economic data in recent months.
The United States reported solid jobs growth for October, with annual wage gains at 9-1/2-year highs, further boosting expectations for a December rate rise.
A similarly upbeat number back in February had sent global financial markets in a tailspin with a massive sell-off in bonds and equities, particularly in emerging markets, and a strong rally in the U.S. dollar.
Markets are now pricing in a higher probability of a December rate hike with further tightening to 2.75-3.00 percent seen through 2019.
"The U.S. employment report supports our view that the Federal Reserve will raise rates three more times from now until mid-2019," Capital Economics said in a note.
"After that, we suspect that the cumulative effect of monetary policy tightening will start taking a toll on the US economy, forcing the Fed to end its tightening cycle and pulling Treasury yields, the US stock market, and the dollar down."
Sterling briefly jumped to a two-week high on Monday on growing hopes of a smooth Brexit.
With just five months to go until Britain exits the European Union divorce talks are at an impasse, a Sunday Times report that an all-UK customs deal will be written into the agreement governing Britain's withdrawal from the European Union was enough to send the pound to $1.3062, its highest since Oct. 22.
May's office said the Sunday Times report was speculative, but added that 95 percent of the withdrawal agreement was settled and negotiations were ongoing.
The pound pared gains to be last up 0.1 percent at $1.2989 after UK's Telegraph newspaper reported significant hurdles still remain in the Brexit negotiation process.
The U.S. dollar struggled on Friday. The dollar index (DXY), which measures the greenback against a basket of major currencies, was last off 0.1 percent at 96.459.
Against the safe haven yen, the dollar held at 113.25 . The euro was flat at $1.1389 (EUR=).
In commodities, oil prices fell as the start to U.S. sanctions against Iran's fuel exports was softened by waivers that will allow some countries to still import Iranian crude, at least temporarily. [O/R]
U.S. crude fell 36 cents to $62.78 per barrel and Brent was last at $72.49, down 34 cents.