A rally in Asian shares sputtered on Thursday, pressured by a pullback in Chinese stocks and higher U.S. yields amid fears that global central banks would keep raising interest rates to combat sticky inflation.
MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.3%, reversing some of the 2.1% gain in the previous session - the index's best day in two months. Japan's Nikkei, on the other hand, eased 0.2%.
Hong Kong's Hang Seng Index retreated 1.0%, after registering the biggest daily gain of 4.2% in nearly three months the previous day, buoyed by unexpectedly robust readings from China PMI surveys.
Investors' enthusiasm has faded somewhat over China's economic reopening after Beijing dismantled its strict COVID-19 controls in December, as analysts look for more evidence to gauge the pace of economic recovery.
U.S. futures erased earlier gains, with the S&P 500 stock futures falling 0.5% and Nasdaq futures down 0.7%.
Tesla shares slumped 5.5% in after-hour trading, after the Tesla Investor Day failed to excite investors. The company will cut vehicle assembly costs by half in future generations of cars, engineers told investors.
"Financial markets are caught between the two narratives of a softer landing, helped by China's reopening, and sticky inflation keeping policy rates higher for longer," said Chris Turner, global head of markets at ING.
"That will probably keep bond markets on the back foot and FX markets volatile in ranges."
Overnight, both bonds and shares took a battering, as inflation indicators from Germany and the United States reinforced expectations that interest rates would go higher and stay there for longer.
Data overnight showed no let-up in stubborn price pressures in Germany, after both Spain and France posted unexpected inflation rises on Tuesday. Germany's 2-year government bond yield rose to its highest since October 2008.
In the United States, manufacturing activity contracted for a fourth straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn.
"The PMI manufacturing data provides a mixed message for global risk appetite, with improving growth trends positive, but lower output prices stalling out," said Alan Ruskin, macro strategist at Deutsche Bank.
"In general, developed markets tend to have a worse balance than emerging markets, in so much as growth is weaker and inflation more sticky."
On Thursday, the benchmark 10-year Treasury yields hit a fresh four-month high of 4.0160%, after hitting 4% overnight. The two-year yields also advanced to 4.9080%, a fresh 15-year high.
Investors still mostly foresee the Fed raising rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis points hike have increased. The probability that the Fed's policy rate, currently set in the 4.5% to 4.75% range, could peak above 5.5% range stood at 53%, compared with 41.5% on Feb. 28, according to CME Fed tool.
Minneapolis Fed President Neel Kashkari said he was inclined "to push up my policy path" after a recent government report showed the Fed's preferred inflation index accelerated in January to a 5.4% annual rate, more than double the Fed's 2% target and slightly faster than the month before.
In the currency markets, the U.S. dollar index, measuring the greenback's value against a basket of major peers, gained 0.2% to 104.6.
The euro lost 0.2% to $1.0646, reversing some of a 0.8% gain overnight, with hotter-than-expected German inflation adding to pressure on the European Central Bank to raise rates.
In the crypto world, shares in Silvergate Capital plunged by as much as 28% after the cryptocurrency-focused bank said it was delaying its annual report and was evaluating its ability to operate as a going concern.
Oil prices were largely steady on Thursday, having risen by 1% the previous day due to optimism over China's recovery. U.S. crude held at $77.67 a barrel. Brent crude was largely unchanged at $84.34 per barrel.
Gold was slightly lower. Spot gold was traded at $1832.53 per ounce.