A look at the day ahead from Dhara Ranasinghe.

The euphoria seen in world stock markets in the first two trading days of the year already appears to be fading.

Asian stocks outside Japan are down 1%, U.S. stock futures point to a weak open and European futures are mixed.

The culprit — rising U.S. Treasury yields sparked by growing speculation that the Federal Reserve could start its rate hiking cycle as early as March.

Money market futures price in a roughly 64% chance of a quarter percentage-point tightening by then, with investors fully pricing such a move by May.

And yes, liquidity is thin and traders haven’t yet fully returned to their desks after the year-end break. But don’t underestimate the signals coming from the U.S. bond market – where interest rate sensitive short-dated bond yields are near their highest levels since early 2020.

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

And so minutes from the Fed’s December meeting, released at 1900 GMT, will be scrutinised for signs of policymakers’ readiness to tighten policy.

There are other reasons for a more cautious note to prevail in markets today. The first is concern that the fast-spreading Omicron could lead to worker shortages.

The United States reported nearly 1 million new coronavirus infections on Monday, the highest daily tally of any country in the world and nearly double the previous U.S. peak set a week ago.

China Evergrande Group also remains in the spotlight. The debt-laden property developer will seek a six-month delay in the redemption and coupon payments of a 4.5 billion yuan ($157 million) bond in a meeting with bond holders this weekend.

Key developments that should provide more direction to markets on Wednesday:

– Sony looks to electric cars for its next big hit

– Gas prices surge in Europe over tight Russian supplies

– Italy sale of new 30-year via bank syndicate could come as early as Wednesday

– Final PMIs from India, Italy, France, Germany, Brazil and U.S.

– 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

(Reporting by Dhara Ranasinghe; Editing by Saikat Chatterjee)