Stock markets struggled on Monday as U.S. Treasury yields reached a new two-year high and investors fretted about the prospect of rising interest rates and a surge in COVID-19 infections.
The small fall on Monday follows on from a bruising first week of the year when a strong signal from the Federal Reserve that it would tighten policy faster to tackle inflation, and then data showing a strong U.S. labour market, unnerved investors who had pushed equities to record highs over the holiday period.
The drop on Monday was limited but across markets.
By 0900 GMT the Euro STOXX dropped 0.26%, Germany's DAX weaked 0.48% while Britain's FTSE 100 slipped 0.1%.
Futures on Wall Street pointed to a mixed open. The S&P 500 suffered its worst start to the year since 2016.
Asian shares bucked the trend on Monday. MSCI's broadest index of Asia-Pacific shares outside Japan added 0.6%
This week is a busy one, with U.S. inflation data due that could all but confirm a U.S. rate rise is coming in March and corporate earnings kicking off.
Analysts fear the U.S. consumer price report on Wednesday will show core inflation climbing to its highest in decades at 5.4% and usher in a rate rise as soon as March.
"The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation," said Ipek Ozkardeskaya, an analyst at Swissquote.
Ozkardeskaya added that there was "plenty of hawkishness" yet to be priced into assets.
While the December payrolls number released last week did miss forecasts, the drop in the jobless rate to just 3.9% and strength in wages suggested the economy was running short of workers.
Markets quickly shifted to reflect the risks with futures implying a greater than 70% chance of a rise to 0.25% in March and at least two more hikes by year end.
Yields on 10-year U.S. Treasury notes hit 1.80% in early trading - levels last seen in early 2020, having shot up 25 basis points last week in their biggest move since late 2019.
"We think that the increase in long-dated Treasury yields has further to run," said Nicholas Farr, an economist at Capital Economics.
"Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25%, by the end of 2023."
Germany's 10-year benchmark yield edged higher to -0.026%, closer to the 0% level it last traded at in 2019.
The dollar index edged up to 95.878. The greenback has failed to find significant support from rising Treasury yields.
The euro stood at $1.1337, down 0.2% on the day. The Japanese yen got a brief break from its recent bear run but still slipped to 115.66.
In commodity markets, gold was a shade stronger at $1,796 an ounce and well short of its January top of $1,831.
Oil prices held to recent gains, having climbed 5% last week helped in part by supply disruptions from the unrest in Kazakhstan and outages in Libya.
Brent was last unchanged at $81.79 a barrel, while U.S. crude traded at $78.93.