By Danilo Masoni

MILAN (Reuters) – Shares fell and the dollar held near highs in holiday-thinned trading on Monday, as concerns about economic growth lingered ahead of an expected U.S. rate hike this week and after data showed COVID-19 lockdowns slowed China’s factory activity.

MSCI’s benchmark for global stocks was down by 0.3% by 0811 GMT, as European and Asian shares fell ahead of the Federal Reserve decision and following Wall Street’s steep losses on Friday in the wake of a disappointing Amazon update.

Data that signalled a steeper pace of contraction in China’s factory activity also dampened risk appetite, although the closure of London and most Asian markets for a holiday reduced volumes.

The pan-European STOXX 600 index fell 1.2%, on course to snap a three-day winning streak. Japan’s Nikkei fell 0.1% and South Korea’s KOSPI declined 0.3%.

Factory activity in China contracted at a steeper pace in April as widespread COVID-19 lockdowns halted industrial production and disrupted supply chains in the world’s second largest economy.

A survey on Monday also showed that euro zone manufacturing output growth stalled in April as factories struggled to source raw materials while demand took a knock from steep price increases and concerns about the economic outlook.

That raised fears of a sharp slowdown in the second quarter that will weigh on global growth, just as central banks around the world start to tighten policy aggressively to combat inflation pressures, exacerbated this year by the war in Ukraine.

Investors expect the Fed to raise rates by 50 basis points on Wednesday, although there was uncertainty around how hawkish Chair Jerome Powell will sound in comments following the decision.

“A 50bp hike in the fed fund target rate and the announcement of the beginning of quantitative tightening seems to be a done deal,” UniCredit economists led by Tullia Bucco said.

“Still, market participants are uncertain as to whether this big leap forward in the Fed’s policy-tightening process will be accompanied by dovish, neutral or hawkish statements from Powell,” they added in a note.

Around 250 basis points of rate hikes are already priced in by money markets by the end of this year, which UniCredit says reduces the scope for hawkish surprises this week.

On Friday, Wall Street suffered its worst drop since 2020, as Amazon slumped on a gloomy quarterly report, and as the biggest surge in monthly inflation since 2005 spooked investors already worried about rising interest rates.

U.S. equity futures bounced back on Monday, sending Nasdaq and S&P 500 e-minis up between 0.8% and 0.6%.

U.S. treasury yields nudged up in European morning trade, staying a little below of their peaks hit last week.

The benchmark 10-year yield added 0.4 basis points to 2.941%, having reached as high as 2.981% on April 20.

The dollar edged back towards its nearly two-decade high and the euro slipped down to $1.05, as investors prepared for the likely Fed rate hike.

The dollar index was last at 103.32, little changed on the day. The euro traded down 0.1% at $1.0536.

Oil prices fell as concerns about weak economic growth in COVID-19 hit China lingered, offsetting risks of supply stress from a potential European ban on Russian crude.

The European Union is leaning toward a ban on imports of Russian oil by the end of the year, two EU diplomats said, after talks between the European Commission and EU member states this weekend.

Brent crude fell 0.9% to $106 per barrel, and U.S. crude lost 1% to $103.69.

Gold prices fell as elevated U.S. yields pressured demand for zero-yield bullion.

Spot gold was down 0.7% at $1,883.66 per ounce.

(Reporting by Danilo Masoni; Editing by Toby Chopra)