Oil prices slumped nearly five per cent on Monday on data showing China's economic recovery stuttering under COVID-19 restrictions and a slumping property sector.
Stock markets mostly steadied and the dollar traded mixed as investors welcome signs of cooling US inflation, which nevertheless remains at the highest level in decades.
"It's been an underwhelming start to the week in financial markets with the eternal optimism of investors clashing with the reality of Chinese economic data," noted Oanda senior market analyst Craig Erlam.
China's central bank slashed key interest rates in a surprise move on Monday as a raft of data showed weakness in the world's second-largest economy.
The figures showed China's industrial production and retail sales growth for July came in lower than expected. Industrial production was up 3.8 per cent year-on-year, but down from 3.9 per cent in June and well below analysts' forecasts.
"The risk of stagflation in the world economy is rising, and the foundation for domestic economic recovery is not yet solid," China's National Bureau of Statistics warned.
Stagflation refers to long-running high inflation combined with rising unemployment and weak growth.
Beijing's rigid adherence to a zero-COVID strategy has held back economic recovery as snap lockdowns and long quarantines batter business activity and a recovery in consumption.
July's retail figures confirmed how fragile consumer confidence remains, said CMC Markets analyst Michael Hewson. "This weakness in the Chinese economy comes against the struggle to adapt to a zero-COVID policy, which the government shows little sign of relaxing, against a backdrop of rising cases," Hewson said. "Problems in the property sector also aren't helping, where many home buyers are halting mortgage payments in protest at delays to the completion of new homes."
Hong Kong ended down 0.7 per cent while Shanghai closed marginally lower.
Tokyo was the standout in Asian trade, climbing 1.1 per cent, as GDP data showed the Japanese economy recovering after the government lifted COVID-19 curbs on businesses.
European stocks were steady approaching the half-way stage, as investors await the release on Wednesday of minutes from the Fed's last policy meeting in July for clues to the US central bank's interest rate plans.
Slowing US inflation has prompted debate on whether the Fed may pivot more quickly from its recent posture of moving aggressively to hike borrowing costs.
Slowing US inflation has prompted debate on whether the Fed may pivot more quickly from its recent posture of moving aggressively to hike borrowing costs
Markets are concerned that, after successive three-quarter point raises, further increases of a similar magnitude could choke off economic recovery.