European stock markets tumbled into the red on Friday after the Bank of England (BoE) warned of a “very sharp slowdown” to come, spooking investors.
On Thursday, Threadneedle Street hiked UK interest rates to a 13-year high of 1% to combat soaring inflation.
However, it warned that inflation was heading to a 40-year high of 10%, while unemployment was set to hit 5.5% by 2025, sending the pound slumping to two-year lows.
It came as US jobs growth rose by more than expected last month, pointing to increased strength in the economy despite a contraction in the first quarter of the year.
Read more: Is the UK heading into a recession?
Non-farm payrolls rose by 428,000 in April, in line with numbers from March, and well ahead of expectations of 380,000, according to the Labour Department on Friday. The unemployment rate was unchanged at 3.6%.
"The solid 428,000 gain in non-farm payroll employment in April illustrates that the Fed was right to ignore the misleading contraction in first-quarter GDP," Paul Ashworth, chief US economist for Capital Economics, wrote in a note.
Meanwhile, the dollar continued to gain against a basket of currencies as investors across the globe shifted away from riskier assets amid fears that higher US interest rates could affect growth.
Victoria Scholar, head of investment at Interactive Investor said: “The Nasdaq slumped 5% on Thursday amid a sell-off across US markets which saw the tech-heavy index as well as the Dow post their biggest one-day drops since June 2020.
“US equities staged a sharp reversal after the Fed-driven rally in the previous session, highlighting the current market volatility which saw the VIX jump almost 23% in yesterday’s trade.”
Watch: How does inflation affect interest rates?
She added: “The pain was felt most acutely in the consumer discretionary and tech sectors as the initial relief that Powell wasn’t planning to get more aggressive on interest rates faded.
"Reality began to set in that inflation and interest rates are both moving in an unfavourable direction for markets, which have been underpinned by cheap money for many years.”
Overnight, Asian shares tumbled to their lowest level in seven weeks amid concerns that China's reinforcement of its zero-COVID policy could hit growth hard.
MSCI's broadest index of Asia-Pacific shares outside Japan fell on the day to its lowest point since 16 March, when Chinese vice premier Liu He boosted shares by pledging to support markets and the economy.
In Hong Kong, the Hang Seng (^HSI) fell 3.7% and the Shanghai Composite (000001.SS) dipped 2.2%. In Japan, the Nikkei (^N225) bucked the trend on its return from a three-day holiday, climbing 0.7% while other key markets lagged.
The Chinese yuan also tumbled to an 18-month low in both onshore and offshore markets.