Stocks, the dollar and bond yields all drifted lower on Monday as investors cashed in on some of their recent bets that the anticipated fiscal boost from the incoming Trump administration will support riskier assets at the expense of bonds.
The financial market hit record highs and the dollar rose to a 14-year peak last week, tempting investors to cash in and book some pre-holiday profit as the last full trading week of the year got underway.
The Japanese yen bounced back strongly from last week's mauling, helped by strong Japanese export data, as the Bank of Japan began a two-day policy meeting at which it is widely expected to keep rates on hold.
Bank stocks were among the biggest fallers in Europe following two weeks of strong gains on the back of rising bond yields. Their decline pushed the broader indices into the red, while Asian stocks slipped to a four-week low.
Europe's index of leading 300 shares retreated from Friday's 11-month high and was down 0.1 %, while banks were down 0.9 %. Shares in Italy's Monte dei Paschi fell 9 % as it made a last-ditch attempt to raise 5 billion euros by year-end and avoid a state bailout.
Germany's DAX and France's CAC were down 0.1 and 0.2 %, respectively, while Britain's FTSE 100 was up 0.1 %. and U.S. stock futures pointed to a slightly higher open on the financial market .
"The Trump rally has stalled a little in recent sessions but so far, I'm seeing few signs that we’re going to see the year out on a negative note," said Craig Erlam, senior market analyst at OANDA.
"Of course, in very quiet periods such as this, these things can often be increasingly difficult to predict," he said.
MSCI's broadest index of Asia-Pacific shares outside Japan fell for the third straight day, shedding 0.3 % to a four-week low. It has lost 3.7 % since Trump was elected.
In addition, investors turned cautious after China's top leaders said over the weekend they would stem asset bubbles in 2017 and place greater importance on the prevention of financial risk.
Japan's Nikkei, which has benefited from the yen's sharp fall against the dollar, snapped its nine-day winning streak, dipping 0.1 % from Friday's one-year high.
Financial markets briefly turned "risk-off" in late U.S. trade on Friday following news that a Chinese Navy warship had seized a U.S. underwater drone in international waters in the South China Sea.
The diplomatic incident appears to have been resolved for now after the two countries said on Saturday that China would return the drone.
MR FOREX, MR BOND
In bonds the 10-year U.S. Treasuries yield stood at 2.58 % in Europe on Monday, down almost two basis points on the day but still close to its two-year high of 2.641 % touched on Thursday.
It has risen almost 100 basis points from the low in the hours immediately after the Nov. 8 U.S. election. That surge, and the Federal Reserve's interest rate hike last week, have pushed the dollar sharply higher of late.
The dollar's index against a trade-weighted basket of six major currencies jumped to a 14-year high of 103.56 last week although it gave up some gains on Monday.
The index last stood at 102.93.
The euro traded at $1.0435, its bounce back from last week's 14-year low of $1.03665 helped by surprisingly strong German business morale data, while the dollar fell 0.6 % against the yen to 117.30 yen.
"The dollar is acting as a brake on the extent of Fed tightening and the extent of the bond sell-off," Societe Generale currency analysts wrote on Monday.
"Mr Forex is hyper-sensitive to these bouts of self-doubt by Mr Bond, and the dollar has backed off a little on this Monday morning," they said.
At its two-day policy meeting the BoJ is widely expected to hold policy, including its twin targets of minus 0.10 % interest on a part of excess reserves and the zero percent 10-year government bond yield.
Fed Chair Janet Yellen will be speaking on "the State of the Job Market" at 1330 EST/1830 GMT, an opportunity for market players to gauge her assessment of the U.S. economy.
Oil prices rose in anticipation of tighter crude supply going into 2017 following the decision by OPEC and other producers to cut output.
Brent futures rose 0.3 % to $55.37 a barrel, while U.S. West Texas Intermediate crude also added 0.3 % to $52.05 per barrel.