LONDON – Heavy falls in European and Asian stock markets followed Wall Street's worst day since mid-2020 on Thursday, 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 percent, led by a 2.2 percent fall in its retail sector , while scarlet red US futures 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 percent on Wednesday while the Nasdaq had fallen almost 5 percent as interest-rate sensitive megacap stocks Amazon, Nvidia and Tesla dropped close to 7 percent and while Apple tumbled 5.6 percent.

MSCI's broadest index of Asia-Pacific shares ex-Japan then snapped four days of gains as it slumped 1.8 percent, dragged down by a 1.65 percent loss for Australia's resource-heavy index, a 2.5 percent drop in Hong Kong. Tokyo's Nikkei shed 1.9 percent too.

Central focus

The 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 percent against a basket of major currencies, after a 0.55 percent jump overnight that ended a three-day losing streak.

The euro gained 0.4 percent on the ECB rate rise view, while the Aussie dollar gained 0.8 percent and New Zealand's kiwi dollar bounced 0.6 percent.

US Treasuries rallied overnight and were bright at 2.84 percent 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 percent 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 $110.41 to $108.25 per barrel in London trading, while US crude dipped to $108.78 a barrel and gold , which has fallen more than 12 percent since March, clawed up to $1,822 per ounce.