Dhara Ranasinghe’s perspective on the future.

Already, the euphoria that was evident in global stock markets during the first two trading days this year seems to be diminishing.

Asian stocks are falling 1% outside Japan, U.S. stock markets point to weakness and European futures remain mixed.

This is the culprit: rising U.S. Treasury yields, triggered by increasing speculation that Federal Reserve would begin rate hikes as soon as March.

The money market futures have a 64% chance that the quarter-point rate of tightening will occur by then. Investors fully price such an event by May.

Yes, liquidity remains thin. Traders have not yet returned fully to their desks following the year-end holiday. However, don’t discount the signal coming from the U.S. Bond Market – where short-dated interest rate-sensitive bond yields have reached their highest level since the early 2020s.

Benchmark 10-year bond yields, and inflation-adjusted counterparts, are both up 13 bps this week.

The Fed released minutes from its December meeting at 1900 GMT. These will then be examined to see if there are any signs that policymakers might tighten.

It is not enough to be cautious in today’s markets. First, there is the concern that Omicron’s rapid growth could cause worker shortages.

On Monday, nearly one million coronavirus cases were reported in the United States. This is the highest number of infections per day for any country and almost doubles the peak that was set by the United States a week earlier.

China Evergrande Group is also still in the limelight. This weekend, the bondholders met with debt-laden property developers to discuss a 6-month extension in redemption and coupon payments for a bond worth 4.5 billion Yuan ($157 Million).

Markets should be more informed by key developments on Wednesday

– Sony (NYSE: ) Electric cars are the next big thing

Europe’s gas prices rise due to tight Russian supplies

Italy could sell new 30-year bonds via bank syndicate as soon as Wednesday

– The final PMIs of India, Brazil (France), Germany, Italy and France)

– France December consumer confidence, Italy preliminary December CPI, US December ADP employment change data out Graphic: US bond yields on the rise, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkjmmwvq/US0501.png