Rising expectations the Federal Reserve will soon scale back its stimulus drove German and U.S. bond yields to multi-month highs on Monday and dealt a blow to emerging markets, with India's rupee cartwheeling to historic lows.
Wednesday's minutes from the last Fed meeting could offer hints on when the U.S. central bank will taper its bond-buying and up-to-date sentiment indicators will help track momentum in the reviving euro zone.
Gains in U.S. yields were not tracked by the dollar, which traded little changed against its currency basket.
"What you are seeing at the moment in a way is central bankers versus the markets," said ABN Amro economist Nick Kounis.
"The markets are pushing up the rate (increase) expectations and central bankers have been trying to pour cold water on the moves, but it is proving more difficult against a background of stronger economic data."
German 10-year yields rose 3.6 basis points to 1.91 percent, having hit their highest since March 2012 at 1.924 percent at the open. Their U.S. counterparts hit fresh two-year highs of 2.871 percent.
"(Bunds are still driven) by the recovery story," said Marius Daheim, chief strategist at Bayerische Landesbank. "It looks like the next mark for Bund yields is this psychologically important 2 percent level."
European shares started the week down as investors cashed in on some of their recent outperformance versus other regions following last week's confirmation that the euro zone exited recession in the second quarter.
Falls of 0.3 percent for London's FTSE and 0.6 percent for both the DAX and CAC 40 in Frankfurt and Paris, put the FTSEurofirst 300 on course for its biggest dip in a month, though from a 2-1/2 month high.
As rising core debt yields make it harder for developing nations to fund widening current account deficits, emerging markets - whose economies are heavily linked to U.S. fortunes and the dollar - took a spill.
The Indian rupee slid as far as 62.50 per dollar, emphatically breaching the previous low of 62.03. The country's share market lost 1.4 percent, on top of a 4 percent drubbing last Friday.
The country's central bank has tried to restrict how much Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors.
"The foreign investor community wants tangible and ambitious reforms that look and feel like a worthy 'second generation' to the fundamental measures adopted in the early 1990s," Westpac analysts said in a note.
There was turbulence elsewhere too. Indonesia's rupiah shed 0.9 percent to four-year lows at 10,475 per dollar.
The strain showed in MSCI's broadest index of Asia-Pacific shares outside Japan which fell 0.5 percent. It had ended last week with gains of 1.45 percent, but that merely recovered ground lost during the previous two weeks.
Crucial later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy might be stabilising and any improvement in the purchasing manager index will be welcomed by Asian investors.
GOLD ON A ROLL
Tokyo's Nikkei share average went its own way and rose 0.8 percent, brushing aside data showing the third-largest trade deficit on record as imports rose even faster than exports. Wall Street was expected to open little changed later.
In the currency market the dollar gave up early, modest gains to stand at $1.3326 per euro, barely moved from Friday. Against the yen it pulled back to 97.54, while the dollar index was a shade firmer at 81.287.
The dollar has been in gradual decline for the past few weeks, in part on concerns the prospect of Fed tapering would scare foreign investors out of U.S. bonds. But at some point yields should reach levels that are attractive to investors.
Hopes for a pick-up in growth globally have also supported commodities. Copper slid 0.7 percent to $7,359 a tonne after hitting a 10-week peak of $7,420 on Friday.
Gold and platinum have gained as well, though they could be threatened if the Fed does wind down its stimulus.
Gold hit a fresh two-month high of $1,384.10 an ounce before dipping back to $1,374. Brent crude futures for October were little changed at $110.38 a barrel.