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The dollar began the week on the back foot on Monday as a bout of risk aversion underpinned the yen, though the United States currency garnered some support on renewed talk of a possible rate hike by the Federal Reserve as early as this month.

Hong Kong's benchmark stock index fell more than 3%, its biggest one-day drop in seven months.

She (Munich: SOQ.MU - news) said on Monday that she wanted to see a stronger trend in US consumer spending and evidence of rising inflation before the Fed raises rates, and that the USA still looked vulnerable to economic weakness overseas.

"The market is anxious that the Fed mentions an interest rate hike even though the recent economic readings were weak", said Toru Ibayashi, head of CIO Wealth Management at UBS Securities.

MSCI's broadest index of Asia-Pacific shares outside Japan.MIAPJ0000PUS fell 2.4 percent, pulling away from a 13-month peak.

The benchmark 10-year U.S. Treasury note yield US10YT=RR stood at 1.643 percent after touching a 2-1/2 month high of 1.697 percent earlier on Monday.

Passersby walk past in front of electronic boards showing Japan's Nikkei share average (L), the Japanese yen's exchange rate against the U.S. dollar (C), British pound (R) and Euro (2nd R) outside a brokerage in Tokyo, Japan, July 6, 2016.

The sell-off there also followed reports that the BoJ could look to steepen the Japanese yield curve at a policy review in September, with markets anxious that, if it goes down that path, tapering buying of long-dated bonds may be among the options.

Super-low bond yields have made returns on equities seem relatively more attractive, so any sustained climb in yields would likely weigh on stock valuations.

Fed Governor Lael Brainard on Monday said she wanted to see a stronger trend in US consumer spending and evidence of rising inflation before the Fed raises rates, and that the USA still looked vulnerable to economic weakness overseas.

"Market participants are wondering if maybe she (Brainard) is being wheeled out to give the market one last warning of a rate hike at next week's meeting", said Marshall Gittler, head of research at broker FXPRIMUS.

"The thinking is that if someone as dovish as she is starts talking like a hawk, people will notice", Gittler said.

"Brainard's was the last speech before the blackout period ahead of the Fed meeting, and she is very close to Yellen".

German bond yields hit on Tuesday their highest levels since June's Brexit result vote to leave the European Union, reversing early falls, in a sign that sentiment remains fragile after last week's European Central Bank meeting left investors disappointed.

US stocks racked up their strongest gain in two months on Monday, with the Dow rising 1.3 percent .DJI and the S&P 500 .SPX gaining 1.5 percent.

German bund yields rose further above zero to as high as 0.06%, their highest since Britain's Brexit vote in late June, and the rise in lower-rated eurozone countries' yields was even sharper.

The perceived safe-haven yen benefited from a drop in global equities.

Against the dollar, the common currency edged up 0.1% to $1.1238. The euro dipped 0.1 percent to $1.1220 while the yen was all but flat at 101.90 per dollar. The dollar index, which tracks it against a basket of six currencies, eased 0.1 per cent to 95.225.

Markets have generally assumed Clinton would win the presidency and have not truly considered the implications, both economic and for national security, should Donald Trump prevail.

The won slid 1 percent to 1,110.38 per dollar, set for its biggest drop since August 29 as a report North Korea is preparing for another nuclear test added to pressure on the currency.

South Korea's Yonhap News Agency reported on Monday that North Korea has completed preparations for another nuclear test, citing South Korean government sources who said the North may use a previously unused tunnel at its mountainous test site.