World shares fell and bond yields remained supported as a surprise 50-basis-point rate increase in Australia raised concern over policy tightening ahead of US inflation data and a European Central Bank meeting this week.
The Reserve Bank of Australia raised rates by the most in 22 years and flagged more tightening to come as it battles to restrain surging inflation, driving a brief spike in the Aussie and hitting local shares.
The MSCI's benchmark for global stocks fell 0.3 per cent to 650 points by 0843 GMT, weighed down by morning losses in Europe and earlier weakness across Asian markets.
The pan-European STOXX 600 equity benchmark index fell 0.4 per cent, while S&P 500 e-mini futures fell 0.4 per cent.
British Prime Minister Boris Johnson survived a no-confidence vote among his Conservative Party's MPs on Monday, but the thin margin of the victory raised talk of a move to replace him, hitting sterling and gilts.
"The vote casts significant doubt about his tenure as leader," said JP Morgan economist Allan Monks.
"Assuming he can buy enough time, the outcome increases the chance that fiscal policy is loosened further in an attempt to turn the situation around. If not, he could yet be forced out with the Conservatives electing a new leader (and hence prime minister)," he added.
The 10-year Treasury yield dipped 1 basis point in European trade following six days of gains, but stayed above the key 3 per cent threshold ahead of data on Friday expected to show still high inflation.
A hot reading could cement fears the Federal Reserve could keep raising rates aggressively beyond the expected 50 bps increase at its upcoming policy meeting next week.
In Europe, benchmark 10-year German bund yields also dipped about 1 basis point but held near Monday's highs ahead on the ECB meeting on Thursday that is expected to confirm rate increases are coming soon. They last traded at 1.31 per cent.
"There've been a couple of catalysts behind those moves higher, but a key one over the last week and a half has been the perception that near-term recession risks are fading back again, which in turn is set to give central banks the space to continue hiking rates and thus take bond yields higher," said Deutsche Bank strategist Jim Reid in a note.
"On top of that, the fact that recent inflation data has proven stickier than expected has also pushed yields higher, and investors are eagerly awaiting to see if we get another upside surprise from the US CPI reading out on Friday," he added.
Meanwhile, 10-year gilt yields hit a fresh seven-year high at 2.265 per cent and were last almost flat on the day, as Johnson emerged weakened from the confidence vote.
In foreign exchange markets, angst ahead of the US inflation data kept the dollar in demand.
The greenback rose to its the highest since 2002 against the yen after Bank of Japan Governor Haruhiko Kuroda stayed dovish, promising support for the economy and easy monetary policy even as prices start to rise.
Sterling fell 0.16 per cent to $1.250 after hitting a three-week low. The euro steadied at $1.069 as losses were limited by the possibility of a hawkish tone from the ECB.
Oil prices edged higher on an expected demand recovery in China as the world's second-biggest economy relaxes tough COVID-19 curbs, and on doubts that a higher output target by OPEC+ producers would ease tight supply.
Brent futures rose 0.4 per cent at $120.03 a barrel and US West Texas Intermediate futures gained 0.5 per cent at $119.09.
The rise in U.S yields and the dollar held gold near one-week lows. Spot gold was up 0.1 per cent at $1,842.9 per ounce.