HONG KONG: Asian markets mostly rose Thursday after the previous day's retreat, though investors continue to fret that surging inflation will lead to interest rate hikes, while the debt stand-off in Washington and prospect of a historic US default was also fraying nerves.

The Dow and S&P 500 provided a positive lead, though the unconvincing end to the trading day on Wall Street indicated lingering uncertainty on trading floors.

While expected for most of the year, the prospect that the Federal Reserve and other major central banks will soon begin to remove the ultra-loose monetary policies they put in place at the start of the pandemic has dampened sentiment in recent weeks.

The planned moves come as officials look to keep a lid on inflation, which has soared this year on the back of economic reopenings but has been more persistent than many predicted owing to supply chain problems.

Asian markets tumble on fears over inflation, Fed and default

Concerns that banks will have to tighten policy quicker and sooner than hoped come as the global economic recovery shows signs of a slowdown, with a spike in Covid infections dragging on sentiment among consumers.

"Growth has clearly hit an air pocket here with concerns about Covid, with the drama going on in Washington right now, the Chinese property sector that has sent tremors to global markets," Christopher Smart, at Barings, told Bloomberg TV.

"Having said that, the general trajectory of the global economy remains very much where it was earlier this year."

Data showed China's factory activity contracted in September for the first time since February 2020 as the country faces an energy crunch that has led to power outages.

While there was little major reaction, analysts warned the problem remained a cause for global concern as it could exacerbate the supply chain crisis and add to inflationary pressures.

US debt stand-off

Still, Fed boss Jerome Powell told other central bank heads Wednesday that the inflation problem would eventually taper off.

"The current inflation spike is really a consequence of supply constraints meeting very strong demand, and that is all associated with the reopening of the economy -- which is a process that will have a beginning, a middle and an end," he told a virtual panel including the bosses of the European Central Bank, Bank of Japan and Bank of England.

"It's very difficult to say how big the effects will be in the meantime, or how long they will last, but we do expect that we'll get back, we'll get through that."

In early Asian trade, Shanghai, Sydney, Seoul, Singapore, Wellington, Taipei, Manila and Jakarta all rose.

But Hong Kong slipped after a three-day gain and Tokyo retreated after a recent rally to three-decade highs.

Traders are also having to deal with a range of other issues, including China's crackdown on private industries, the potential collapse of its property colossus Evergrande, and US haggling over the debt ceiling.

Republicans have blocked Democrat moves to lift the borrowing limit and with Treasury Secretary Janet Yellen warning the government will run out of cash to meet its obligations on October 18 the race is on to avert what many say could be a catastrophic default.

Observers say that while the row is merely political brinkmanship, the fact that the deadline was so close was making waves on trading floors.

The row comes as Democrats also struggle to push through President Joe Biden's multi-trillion-dollar infrastructure and social spending bills.

Key figures around 0230 GMT

Tokyo - Nikkei 225: DOWN 0.4 percent at 29,439.37 (break)

Hong Kong - Hang Seng Index: DOWN 0.8 percent at 24,466.65

Shanghai - Composite: UP 0.5 percent at 3,553.80

Dollar/yen: DOWN at 111.83 yen from 111.98 yen at 2100 GMT

Euro/dollar: UP at $1.1609 from $1.1604

Pound/dollar: UP at $1.3452 from $1.3419

Euro/pound: DOWN at 86.29 pence from 86.38 pence

West Texas Intermediate: DOWN 0.2 percent at $74.69 per barrel

Brent North Sea crude: DOWN 0.3 percent at $78.40 per barrel

New York - Dow: UP 0.3 percent at 34,390.72 (close)

London - FTSE 100: UP 1.1 percent at 7,108.16 (close)