SYDNEY - Asian shares on Friday were headed for the worst month since the onset of the Covid-19 pandemic, while jitters in currency and bond markets persisted over hawkish talk from central banks, rising geopolitical risk and worries about global recession.

Japan's Nikkei fell 1.8 per cent, while Hong Kong's Hang Seng Index dropped 0.35 per cent and the Shanghai Composite declined 0.3 per cent.

South Korea's Kospi index slid 0.5 per cent and Australia's S&P/ASX 200 Index tumbled 0.9 per cent.

Singapore's Straits Times Index was down 0.5 per cent at 10.43am local time.

Relief came from Chinese factory activity data that beat market expectations, with the manufacturing sector returning to growth in September after contracting for two months.

Still, MSCI's broadest index of Asia-Pacific shares outside Japan was set to record a staggering 12.5 per cent drop for the month, the largest since March 2020 when the Covid-19 pandemic threw financial markets into chaos.

Hong Kong shares were likely heading for their worst quarter since 2001 and Chinese blue chips might also finish September by recording their biggest quarterly loss since a stock market meltdown in 2015.

"The 'troubling triad' of rising rates, slowing growth and strong dollar have all intensified," said Mr Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs.

"We reduce our forecasts further and expect largely flat regional performance over the next two quarters with better returns on a 12-month view."

In currency markets, traders remained edgy amid risk of intervening from central banks.

The United States dollar was little changed against a basket of major currencies at 111.88 on Friday, after retreating 0.9 per cent the previous day.

However, it is up 2.9 per cent for the month, the best since April. The relentless rise of the US dollar has pushed the Japanese yen, Chinese renminbi and many emerging market currencies to record lows.

Traders are also wary of possible intervention from China and Japan. Reuters reported that China's central bank has asked major state-owned banks to be prepared to sell dollars for the local currency in offshore markets.

In Europe, Britain's gilt market has been roiled along with the pound by government plans for heavy borrowing to finance spending.

Prime Minister Liz Truss said on Thursday that she will stick to her plan to reignite economic growth, breaking her silence after nearly a week of financial market chaos.

German Chancellor Olaf Scholz has set out a €200 billion (S$281 billion) "defensive shield", including a gas price brake and a cut in sales tax for the fuel, to protect companies and households from the impact of soaring energy prices.

This came as Europe braces for a double-digit inflation reading later in the day, as the European Central Bank voiced support for another big interest rate hike. German inflation accelerated to 10.9 per cent this month, far beyond market expectations.

"Increased uncertainty and risks - and higher interest rates - logically see higher volatility in financial markets. Even G-7 countries are now trading like emerging markets," said Mr Jan Lambregts, head of global economics and markets research at Rabobank, referring to the Group of Seven major economies.

"Indeed, markets now also see a far wider range of possible outcomes when it comes to forex and rate movements."

US Treasuries stabilised somewhat after a renewed bout of selling on hawkish talk from Federal Reserve officials, with the yield on 10-year bonds up by four basis points in early Asia trading to 3.7815 per cent.

The two-year Treasury yield also rose a similar amount to 4.2048 per cent.

A strong US jobs market with weekly jobless claims hitting a five-month low adds to the case of more aggressive tightening from the Fed. Overnight hawkish comments from Fed officials offered no indication that recent foreign exchange and bond market drama will lead the central bank to back off from its rate hike course.

Further weighing on market sentiment, Russian President Vladimir Putin will begin annexing four Ukrainian regions to his country on Friday, a move that the United Nations said would mark a "dangerous escalation" and jeopardise prospects for peace.

Oil prices were little changed in early trade on Friday. US crude ticked up 0.11 per cent to US$81.32 a barrel, while Brent crude rose to US$88.51 per barrel.

Gold was slightly higher. Spot gold was traded at US$1,663.29 an ounce. REUTERS