By Xie Yu

HONG KONG (Reuters) - Most Asian stocks fell on Tuesday, while the U.S. dollar and oil steadied, as investors held safe ranges awaiting more clues on whether central banks will continue their aggressive interest rate hikes.

Market conditions were also subdued heading into the U.S. Independence Day public holiday on Tuesday, with most of Wall Street closed.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.1%, by Tuesday mid-morning.

Australian shares were mostly flat, as investors waited to see whether the central bank will tighten again when it announces a policy decision later in the day.

Japan's Nikkei share average fell 1.1% as investors exited some bullish positions after the benchmark index closed at a 33-year high in the previous session.

China's mainland benchmark and Hong Kong's Hang Seng Index were each down by 0.2%.

U.S. S&P 500 E-mini stock futures slipped 0.1% in Asian trade. Wall Street stock indexes ended Monday's shortened session up slightly along with Treasury yields.

In coming days, investors are watching out for a mixed bag of economic data ahead of second-quarter earnings, while uncertainty remains over the Federal Reserve's policy path, said Manishi Raychaudhuri, head of Asia Pacific equity research at BNP Paribas (OTC:BNPQY).

The minutes from the Fed's last meeting are due later this week, which could provide additional clues on policy direction but also inject some volatility, he said.

"If the Fed overtightens and decides to do more rate hikes than twice as the market widely expected, then there's a concern that the recession may turn out to be deeper than what is being factored in," Raychaudhuri said.

Geopolitical tensions also persist, he noted, with China's export controls on minerals adding more uncertainty around global trade relations.

In the currency market, the dollar index, which tracks the greenback against six major peers, rose slightly to 102.97.

Oil prices held steady on Tuesday, after settling 1% lower on Monday, as markets weighed supply woes from cuts for August by top exporters Saudi Arabia and Russia against economic data that suggested demand was weak.

Brent crude futures were up 0.3% at $74.87 a barrel. U.S. West Texas Intermediate crude also added 0.3% to $70.06.

The Treasury market is shut Tuesday for Independence Day. On Monday, a widely watched section of the U.S. Treasury yield curve hit its deepest inversion since the high inflation era of Fed Chairman Paul Volcker, reflecting financial markets' concerns that an extended Fed hiking cycle will tip the United States into recession.

By Ankur Banerjee

SINGAPORE (Reuters) - The yen nudged up on Tuesday but remained vulnerable to more weakness, hovering near the key 145 per dollar level as markets were on alert for signs of intervention, while the Australian dollar moved up ahead of a central bank policy decision.

The yen was up 0.17% at 144.42 per dollar in early Asian hours, but remained close to last week's eight month low of 145.07 per dollar that prompted Finance Minister Shunichi Suzuki to warn against excessive yen selling.

Earlier on Tuesday, Japan's top financial diplomat Masato Kanda said that officials were in close contact with U.S. Treasury Secretary Janet Yellen and other overseas authorities almost everyday on currencies and broader financial markets.

"This is sending signals that a coordinated intervention may be coming as yen continues to hover above 144 per dollar," said Charu Chanana, market strategist at Saxo Markets.

"A coordinated intervention usually has a longer lasting impact on the yen than a unilateral intervention would have."

Japan bought yen in September, its first foray in the market to boost its currency since 1998, as the Bank of Japan's pledge to retain ultra-loose policy as long as required drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.

Against a basket of currencies, the dollar eased 0.039% to 102.910 after data overnight showed U.S. manufacturing slumped further in June, reaching levels last seen when the nation was reeling from the initial wave of the COVID-19 pandemic.

"We expect the U.S. economy to face a recession starting in Q3 23," Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), adding that it was likely to be a quiet day for the currency market with no major data releases or central bank speech scheduled. U.S. markets are closed for the July 4 Independence Day holiday.

Investor focus this week will be on nonfarm payrolls data along with jobs report for more clues about the broader labour market in the United States. Minutes of the U.S. Federal Reserve's June meeting are also due to be released on Wednesday.

Markets are pricing in a near 87% chance of a 25 basis point hike in the next Federal Reserve meeting at the end of the month, the CME FedWatch tool showed.

RBA WATCH

The focus in Asian hours will be on the policy decision from the Reserve Bank of Australia (RBA).

Markets are leaning towards a pause, with swaps pricing a 63% chance of a hold in rates after data last week showed consumer inflation slowed to a 13-month low in May. But economists were split on the outcome, with 16 out of 31 polled by Reuters expecting a hike and the rest forecasting the bank to stand pat. [AU/INT]

Since a surprise pause in April and subsequent hikes in May and June, economists have been mostly divided in recent months over the RBA's next move.

CBA's Clifton said the slight easing in inflation in May should please the RBA but with a tight labour market as well as still high price pressures, a 25 bps hike would not be a surprise.

"We estimate that a hike would push up Aussie modestly by 0.8% so long as the post‑meeting statement was not dovish.  No change or a dovish hike could pull AUD modestly lower." 

The Australian dollar was at $0.668, up 0.16% against the U.S. dollar, while the New Zealand dollar was also up 0.16% at $0.616.

The euro was up 0.02% to $1.0913, while sterling was last at $1.2699, up 0.06% on the day.

========================================================

Currency bid prices at 0209 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar $1.0908 $1.0915 -0.04% +1.82% +1.0915 +1.0908

Dollar/Yen 144.6100 144.6900 -0.09% +10.15% +144.6900 +144.4500

Euro/Yen 157.76 157.87 -0.07% +12.44% +157.9100 +157.6000

Dollar/Swiss 0.8965 0.8965 +0.02% -3.03% +0.8967 +0.8958

Sterling/Dollar 1.2691 1.2691 +0.02% +4.95% +1.2701 +1.2688

Dollar/Canadian 1.3248 1.3249 -0.01% -2.22% +1.3256 +1.3246

Aussie/Dollar 0.6679 0.6671 +0.10% -2.03% +0.6684 +0.6670

NZ 0.6158 0.6152 +0.11% -3.01% +0.6164 +0.6154

Dollar/Dollar

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

By David Randall

(Reuters) - A widely watched section of the U.S. Treasury yield curve hit its deepest inversion on Monday since the high inflation era of Fed Chairman Paul Volcker, reflecting financial markets' concerns that an extended Federal Reserve rate hiking cycle will tip the United States into recession.

The closely-watched spread between the 2-year and 10-year U.S. Treasury note yields hit the widest since 1981 at -109.50 in early trade, a deeper inversion than in March during the U.S. regional banking crisis. The gap was last at -108.30 bp.

Signs of strength in the U.S. economy have prompted market participants to price in the possibility of additional rate hikes this year to keep inflation in check. Futures markets had reflected rate cuts at the central bank's September meeting as recently as May, and are now projecting that the first cuts will come in January.

"The absence of a meaningful round of dip buying is attributable to instability in the policy outlook; once investors are confident in Powell’s vision of terminal [rates], the prevailing bearish bias will be replaced by a more balanced tone," Ian Lyngen, head of U.S. rates strategy at BMO, said in a note Monday.

A yield curve inversion - in which shorter-dated Treasuries trade at higher yields than longer-dated securities - has been a reliable signal of upcoming recessions. The 2/10 year yield curve has inverted six to 24 months before each recession since 1955, according to a 2018 report by researchers at the San Francisco Fed, offering only one false signal in that time.

The spread between 2 and 10-year Treasuries has been inverted since last July.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, rose 3.6 basis points at 4.913% in morning trading Monday. The yield on 10-year Treasury notes was up 1.2 basis points to 3.831%.

SEOUL (Reuters) -South Korea's consumer inflation slowed more than expected and hit a 21-month low, official data showed on Tuesday, weighed by falling oil and agricultural product prices.

The consumer price index rose 2.7% in June from a year earlier, compared with an increase of 3.3% in May and a median forecast of 2.85% in a Reuters survey of economists.

It softened for a fifth consecutive month and marked the weakest annual increase since September 2021, according to Statistics Korea.

Core inflation, which excludes volatile food and energy prices, slowed to 3.5% from 3.9% a month before, marking the slowest annual rise since May, 2022.

The headline index was flat on a monthly basis, compared with a 0.3% rise in the previous month and a 0.2% increase expected by economists.

Prices of petroleum products dropped 4.0% over a month and agricultural products fell 0.9%, but public utility prices rose 2.2%.

Services prices rose 3.3% from a year earlier, weaker than 3.7% in May and the slowest in 14 months.

South Korea's central bank has kept monetary policy unchanged since its last interest rate hike in January and its tightening campaign is widely expected to be over. The bank next meets on July 13.

By Andrea Shalal

WASHINGTON (Reuters) - U.S. Treasury Secretary Janet Yellen will travel to Beijing from July 6-9 for meetings with senior Chinese officials on a broad range of issues, including U.S. concerns about a new Chinese counterespionage law, a senior Treasury official said on Sunday.

Yellen's long-anticipated trip is part of a push by President Joe Biden to deepen communications between the world's two largest economies, stabilize the relationship and minimize the risks of mistakes when disagreements arise, the official told reporters.

It comes just weeks after Secretary of State Antony Blinken visited Beijing and agreed with Chinese President Xi Jinping to stabilize ties and ensure the two countries' intense rivalry does not veer into conflict. China protested loudly when Biden subsequently referred to Xi as a "dictator," but analysts say the remark had little impact on efforts to improve ties.

The Treasury chief plans to tell China's new economic team that Washington will continue to defend human rights and its own national security interests via targeted actions against China, but wants to work with Beijing on urgent challenges such as climate change and debt distress faced by many countries.

"We seek a healthy economic relationship with China, one that fosters growth and innovation in both countries," the official said. "We do not seek to decouple our economies. A full cessation of trade and investment would be destabilizing for both our countries and the global economy."

The official, speaking on condition of anonymity, declined to give details on which Chinese officials Yellen would meet in Beijing. A second administration official told Reuters that Yellen was expected to meet the Chinese Vice Premier He Lifeng.

Yellen would underscore Washington's determination to strengthen its own competitiveness while responding with allies to what Washington calls "economic coercion" and unfair economic practices by China, the first official said.

One clear area of concern involved China's new national security and espionage law, and the potential implications for foreign and U.S. firms, the official added.

"We have concerns with the new measure, and how it might apply, that it could expand the scope of what is considered by the authorities in China to be espionage activity," the official said, citing possible spillovers to the broader investment climate and the economic relationship.

While no major "breakthroughs" were expected, Treasury officials hope to have constructive conversations and build longer-term channels of communication with China's new economic team, including at the sub-cabinet level, the official said.

U.S. officials would also reiterate concerns about human rights abuses against the Uyghur Muslim minority, China's recent move to ban sales of Micron Technology (NASDAQ:MU) memory chips, and moves by China against foreign due diligence and consulting firms.

Yellen would also talk with Chinese officials about a long-awaited U.S. executive action curbing outbound investment in China in certain critical sectors, and "make sure they don't think something is more sweeping than it is or than it's intended to be," the official said.

By Yoruk Bahceli

(Reuters) - Bond investors could be in luck for the rest of 2023 if market indicators signalling central banks will take policy tightening too far and tip their economies into recession prove accurate.

Headline inflation has eased but underlying pressures remain high, keeping central banks hawkish. Canada resumed tightening and Britain and Norway made big moves in June, while U.S. Federal Reserve and European Central Bank officials at last week's Sintra forum signalled more rate hikes.

Markets now anticipate a 25 basis point Fed hike, probably in July, and see a 30% chance of another by November, and have reduced the number of cuts they expect next year.

They are pricing in two more ECB hikes to 4%, a change from the single hike to 3.75% they foresaw earlier in June, while the Bank of England is expected to raise its main rate near to 6.25%, much more than the 5.5% previously expected.

Along with those bets, yield curve inversion - where shorter-dated bonds offer higher yields than longer-dated ones, seen as a good sign that investors expect a recession - has deepened as yields on shorter maturities surge.

U.S. 10-year Treasuries are yielding 104 bps less than two-year peers, the most since March's banking sector mayhem and almost their deepest inversion since the 1980s.

Similar patterns can be seen in German and British debt.

"What the yield curve is telling you is that this is extremely tight monetary policy," said Mike Riddell, senior fixed income portfolio manager at Allianz (ETR:ALVG) Global Investors, which manages 514 billion euros ($558.31 billion) in assets.

"We are positioned for a very big bond rally, and we think that risky assets are completely underestimating the risk of a recession or something nasty happening," he added.

"I am essentially positioned for this being a policy error."

BETTER YEAR

A policy overstep that central bankers had to reverse would be good news for investors in global government bonds, who CFTC data shows have piled up bets that U.S. bond prices will fall.

That means any turn in sentiment could lead to a big rally, boosting returns that have been less than 2% year-to-date after a 13% loss last year.

An early sign that the bond outlook is improving came last week with data showing euro zone business growth stalled in June. In response, German bond yields, which move inversely to prices, posted their second biggest daily drop since March.

But highlighting how hard economic data has become to read, higher-than-expected U.S. first quarter growth and German inflation sent yields surging on Thursday.

Investors on alert for a policy mistake fear that central bankers are basing their decisions on inflation and other backward-looking data that aren't yet showing the full impact of previous hikes, and overlooking signs of pending disinflation.

One indicator in focus is producer price inflation, seen as a harbinger of broader inflation. It dropped to 1% annually in Germany and 2.9% Britain in May, the lowest in over two years, and has dropped similarly in the United States.

"We all made a big deal this time last year when (producer price inflation) was on the way up. But it seems like it's being ignored on the way down," said Vanda (NASDAQ:VNDA) Research global macro strategist Viraj Patel.

Deutsche Bank (ETR:DBKGn) says the Fed may be "overcompensating" for starting rate hikes too late, pointing to improvements in the labour market, signs of a pending fall in rent inflation and tightening bank lending standards.

Such forward-looking figures suggest economic data could turn quite sharply, Vanda's Patel said, adding that across big economies, every hike now raised the chance of a policy error.

Major central banks fighting a surge in inflation have collectively raised borrowing costs by over 3,750 bps since September 2021.

TRICKY

Josefine Urban, portfolio manager at Britain's biggest investor, Legal and General Investment Management, said she favoured bets that British government bonds would outperform U.S. and German peers.

The 10-year yield on UK Gilts has surged 75 bps to 4.43% this year, while yields on U.S. and German equivalents hardly moved.

"We do think that given (the BoE) are ... mainly focused on lagging data, so they're looking at inflation data, wage data, the labour market, there's quite a big risk that they do over-tighten and that we will then get the recession," Urban said.

Forecasts aren't always right: late in 2022, 60% of economists polled by Reuters expected a U.S. recession this year, but none has yet materialised and risk assets that would be hit by one have barely blinked.

But even those not betting on a contraction are cautious.

"Our base case is not that we're going to get a recession but the risks are definitely growing," said Jill Hirzel, senior investment specialist at Insight Investment.

Central bankers' "priorities have been made very clear that if the risk is a recession, they're okay with that to bring inflation down," said Hirzel, adding she favoured investing in defensive sectors and higher-rated corporate bonds.

($1 = 0.9206 euros)

By Leika Kihara

TOKYO (Reuters) -Asia's factory activity slumped in June, business surveys showed on Monday, as sluggish demand in China and advanced nations clouded the outlook for the region's exporters.

While manufacturing activity expanded marginally in China, it contracted in powerhouses Japan and South Korea as Asia's fragile economic recovery struggled to maintain momentum.

The surveys underscore the toll China's weaker-than-expected rebound from COVID lockdowns is inflicting on Asia, where manufacturers are also bracing for the fallout from aggressive U.S. and European interest rate hikes.

"The worst may have passed for Asian factories but activity lacks momentum because of diminishing prospects for a strong recovery in China's economy," said Toru Nishihama, chief emerging market economist at Dai-ichi Life Research Institute.

"China is dragging its feet in delivering stimulus. The U.S. economy will likely feel the pain from big rate hikes. These factors all make Asian manufacturers gloomy about the outlook."

China's Caixin/S&P Global manufacturing purchasing managers' index (PMI) eased to 50.5 in June from 50.9 in May, the private survey showed on Monday, staying above the 50-point index mark that separates growth from contraction.

The figure, combined with Friday's official survey that showed factory activity extending declines, adds to evidence the world's No. 2 economy lost steam in the second quarter.

The impact is being felt in Japan where the final au Jibun Bank PMI fell to 49.8 in June, returning to a contraction after expanding in May for the first time in seven months.

New orders from overseas customers decreased in June at the fastest rate in four months reflecting feeble demand from China, the Japan PMI survey showed.

South Korea's PMI fell to 47.8 in June, from 48.4 in May, extending its downturn to a record 12th consecutive month on weak demand in Asia and Europe.

Factory activity also contracted in Taiwan, Vietnam and Malaysia, the PMI surveys showed.

Asia's economy is heavily reliant on the strength of China's economy, which saw growth rebound in the first quarter but subsequently fell short of expectations.

The fate of Asia's economy, including China's, will have a huge impact on the global economy with aggressive monetary tightening to curb inflation likely to weigh on U.S. and European growth.

In forecasts released in May, the International Monetary Fund said it expects Asia's economy to expand 4.6% this year after a 3.8% gain in 2022, contributing around 70% of global growth.

But it cut next year's Asian growth forecast to 4.4% and warned of risks to the outlook such as stickier-than-expected inflation and slowing global demand.

SYDNEY (Reuters) - Australian home prices rose for a fourth consecutive month in June as a sustained squeeze on housing supply helped lift values nationwide, data showed on Monday.

Property consultant CoreLogic figures showed national home prices were up 1.1% in June from the previous month, after bottoming in February and starting a sustained rise.

Australia's households are among the most indebted in the world, while housing affordability has recently plumbed all-time lows.

The Reserve Bank of Australia is set to raise its key interest rate by 25 basis points to 4.35% on Tuesday to curb stubbornly high inflation, although a Reuters poll of economists suggested the decision would be a close call.

Every state and territory capital except Tasmania's Hobart recorded higher prices for dwellings, according to CoreLogic. Sydney, Australia's biggest city and capital of New South Wales, led the way with a 1.7% surge. Brisbane, the capital of Queensland, followed at 1.3%.

CoreLogic's Tim Lawless said a lack of supply was still the main driver of price rises, adding that "the flow of new capital city listings was nearly 10% below the previous five-year average" in June.

While values continued to record "broad-based upswing", the pace of growth in most capitals slowed, according to CoreLogic.

"A slowdown in the pace of capital gains could be a reflection of a change in sentiment as interest rate expectations revise higher," Lawless said. 

"Higher interest rates and lower sentiment will likely weigh on the number of active home buyers, helping to rebalance the disconnect between demand and supply."

Investing.com -- Friday’s nonfarm payrolls report and Wednesday’s minutes of the Federal Reserve’s June meeting will be the highlights of a holiday-shortened week. The stock markets go into the second half with a tailwind after strong gains in the first six months of the year. The Reserve Bank of Australia is set to make its latest rate decision while PMI data from China is likely to underscore the need for more stimulus measures

1. Nonfarm payrolls

Friday’s U.S. employment report will be the main event, with economists expecting the economy to have added 200,000 jobs in June.

In May, the economy added a far larger than forecast 339,000 jobs, although an uptick in the unemployment rate to a seven-month high of 3.7% indicated that labor market conditions were easing.

Signs of continued strength in the labor market could underline a view that has helped boost markets this year: that the U.S. economy can avoid a severe recession despite the Fed’s aggressive tightening.

"The labor market is probably going to end up proving to be the big catalyst for what may happen market-wise and also monetary policy-wise," Omar Aguilar, chief executive officer and chief investment officer of Schwab Asset Management told Reuters.

Ahead of Friday’s jobs report, markets will get updates on other areas of the labor market with data on private sector hiring from ADP, JOLTS job openings and weekly unemployment claims.

2. Fed minutes

The Fed on Wednesday is to publish the minutes of its June 13-14 meeting when it held rates steady after 10 straight rate hikes, but indicated that two more increases are coming this year, including one widely expected in July.

On Friday a gauge of inflation that is closely followed by the U.S. central bank indicated that price pressures are cooling, fueling hopes the Fed could be near the end of its rate-hiking cycle.

The minutes should give investors more insight into the debate over what Fed Chair Jerome Powell has said is an increasingly even balance of risks between doing too little and going too far on policy tightening.

In comments last Thursday Powell reiterated that "a strong majority" of Fed policymakers expect they will need to raise interest rates at least twice more by year's end.

3. Second half gets underway

The U.S. stock market has rallied in the first half of 2023, powering higher despite a crisis in the banking sector and fears over the prospect of a recession.

The S&P 500 has risen 15.9% since the start of the year and the tech-heavy Nasdaq Composite has gained 31.7%, for its biggest first-half increase in 40 years.

"We have had a pretty resilient market in the first half of this year,” Mona Mahajan, senior investment strategist at Edward Jones told Reuters. “The market needs one big question answered, and that is what does the economy look like in the back half of the year.”

Investors are hoping that the strong gains in the first half of the year will give a tailwind to markets going into the second half of the year, but this month will bring several market-moving events - Friday’s jobs report, followed by the start of second-quarter earnings season along with a key inflation report next week ahead of the Fed’s next policy decision on July 26.

4. RBA decision

The Reserve Bank of Australia holds its July policy meeting on Tuesday and markets are unsure of whether it might further raise the 4.1% cash rate or pause to see how past tightening is working.

The RBA has hiked interest rates by a huge 400 basis points in the past year in an attempt to cool demand and curb sky-high inflation.

Resilient retail sales data last Thursday suggested some cushion for another rate rise, a day after data showing that inflation slowed sharply in May to its lowest in 13 years saw an aggressive paring of tightening bets.

Prior to that, a blockbuster jobs report mid-month had seen hike bets rise, after getting wound down following surprisingly dovish minutes of the June meeting, showing the decision to raise rates was "finely balanced".

5. China factory PMI

China is to release the Caixin purchasing managers index on Monday which will give an update on the strength of the manufacturing sector as the post-COVID economic recovery in the world’s second-largest economy falters.

The data is likely to underscore the need for more stimulus measures amid weak demand both at home and abroad and prop up a weakening currency.

The yuan has lost nearly 5% to the dollar this year, becoming one of the worst-performing Asian currencies.

Widening bond yield differentials between the U.S. and China, fueled by growing monetary policy divergence have pressured the yuan.

--Reuters contributed to this report

LONDON (Reuters) -Markets are on the alert to which sectors will buckle under the sharpest jump in interest rates in decades, with big rate moves this month in Britain and Norway a reminder that the tightening is not over.

Central banks may need longer to lower inflation and a fresh bout of financial turbulence could make the process even more protracted, the International Monetary Fund warns.

Stability has returned since March's banks turmoil, but warning lights are flashing elsewhere and tensions in Russia provide another possible trigger for stress.

Here is a look at some of the pressure points.

1/ REAL ESTATE: PART 1

Just as hopes for an end to Federal Reserve rate hikes boost the U.S. housing market, European residential property is suffering under rate hikes.

UK rates have jumped to 5% from 0.25% two years ago and 2.4 million homeowners will roll off cheap fixed rate mortgages onto much higher rates by end-2024, banking trade body UK Finance estimates.

Sweden, where rates rose again on Thursday, is one to watch with most homeowners' mortgages moving in lockstep with rates.

London Business School economics professor Richard Portes said, euro zone housing markets appear to be "freezing up" as transactions and prices fall. "You can expect worse in 2024 when the full effects of rate hikes come forth," he said.

2/ REAL ESTATE: PART 2

Having taken advantage of the low rates era to borrow aplenty and buy up property assets, the commercial real estate sector is grappling with higher debt refinancing costs as rates rise.

"The single most important thing is interest rates. But not just interest rates; what it is equally important is the predictability of rates," said Thomas Mundy, EMEA head of capital markets strategy at real estate firm JLL.

"If we were settled on an interest rate, real estate prices could adjust. But at the moment, the lag in the adjustment to real estate pricing is creating an uncertain environment."

In Sweden, high debts, rising rates and a wilting economy has produced a toxic cocktail for commercial property.

And HSBC's decision to leave London's Canary Wharf for a smaller office in the City highlights an office downsizing trend rocking commercial real estate markets.

3/ BANK ASSETS

Banks remain in focus as credit conditions tighten.

"There is no place to hide from these tighter financial conditions. Banks feel the pressure of every central bank," said Lombard Odier Investment Managers' head of macro Florian Ielpo.

Banks hold two types of balance sheet assets: those meant for liquidity and those that work like savings meant to earn additional value. Rising rates have pushed many of these assets 10%-15% lower than their purchase price, Ielpo said. Should banks need to sell them, unrealised losses would emerge.

Most at risk are banks' real estate assets. Federal Reserve chief Jerome Powell says the Fed is monitoring banks "very carefully" to address potential vulnerabilities.

Lending standards for the average household are also a concern. Ielpo expects consumers will stop paying loan payments in the third and fourth quarters.

"This will be the Achilles heel of the banking sector," he added.

4/ DEFAULT

Rising rates are taking a toll on corporates as the cost of their debt balloons.

S&P expects default rates for European sub-investment grade companies to rise to 3.6% in March 2024 from 2.8% this March.

Markus Allenspach, head of fixed income research at Julius Baer, notes there were as many defaults globally in the first five months of 2023 as there were during 2022.

French retailer Casino is in debt restructuring talks with its creditors. Sweden's SBB has been fighting for survival since its shares plunged in May on concern over its financial position.

"We are starting to see distress building up in the corporate space, especially at the low end where you have most floating rate debt," said S&P Global (NYSE:SPGI) Ratings' Nick Kraemer.

5/ RUSSIA AFTER WAGER MUTINY

The Wagner mutiny, the gravest threat to Russia's Vladimir Putin's rule to date, might have been aborted, but will long reverberate. Any changes to Russia's standing - or to the momentum behind the war in Ukraine - could be felt near and far.

There's the immediate fallout for commodity markets from crude oil to grains, the most sensitive to domestic changes in Russia. And knock on effects, from inflation pressures to risk aversion in case of a major escalation, could have far reaching consequences for countries and corporates already feeling the heat from rising rates.

"Putin can no longer claim to be the guarantor of Russian stability and you don't get that kind of fragmentation and challenges to the system in a stable and popular regime," said Tina Fordham, geopolitical strategist and founder of Fordham Global Foresight.