Most equity markets slipped Tuesday with investors contemplating the prospect of rising US borrowing costs as inflation spikes, while US lawmakers' struggle to raise the debt ceiling is also agitating nerves on trading floors.

Fears over the possible collapse of troubled Chinese developer Evergrande have abated for now, though the crisis is being closely followed.

Meanwhile, analysts said concerns that an energy crunch in China could hit growth in the world's number two economy were adding to the downbeat mood, with Goldman Sachs lowering its outlook for this year.

With the US economy back on track — and several Federal Reserve officials saying their goals of sustained inflation and tackling unemployment are close to being met — the US central bank is expected to begin tapering its ultra-loose monetary policy within months.

The policy committee essentially signalled such a move at its meeting last week, while a closely watched guide to its interest rate plans suggested a rate hike could even come before the end of next year.

"Central bankers have set out how they want to 'normalise' monetary policy for some time. That process could start soon," Chris Iggo of AXA Investment Managers said.

"The realisation of this has the potential to provoke some volatility in rates and equities."

On Wall Street the Dow edged up but the S&P and Nasdaq fell into the red, with tech firms more susceptible to higher interest rates.

And the selling filtered through to Asia, where Tokyo, Sydney, Seoul, Singapore, Wellington, Mumbai, Taipei and Manila followed suit.

London, Paris and Frankfurt were also down in the morning.

However, Hong Kong rose more than one percent, having taken a battering in recent weeks from China's crackdown on a range of industries — particularly tech firms and Macau-based casinos — and the Evergrande crisis. Shanghai also rose.

– US debt 'pantomime' –

Initial fears that the collapse of the embattled firm could spill into the global economy have eased. But there is still concern that if the issue is not handled properly the Chinese property sector, which accounts for a huge part of the economy, could take a massive hit.

The People's Bank of China on Monday said it would ensure a "healthy property market" and protect buyers' rights, as it looks to temper anger among investors about Evergrande failing to complete their properties, despite taking their money.

The central bank's comments come after a tightening of rules around the real estate sector by Beijing strangled firms' ability to invest and construct buildings, a major reason for Evergrande's woes.

"There may be fine-tuning of policies, even though a systemic relaxation of property curbs is unlikely," Zhong Linnan of GF Securities said in a report.

Adding to the sense of unease among investors is the drawn-out debt limit saga in Washington, where Republicans have blocked a Democrat move to raise the US borrowing limit, meaning the government will likely run out of cash at the end of the week.

But more worryingly, the country could default on its debt obligations next month, which most observers say would spark a massive financial crisis, with Republicans saying they refuse to pay for Democrats' spending plans.

Several top officials including Treasury Secretary Janet Yellen and Fed chief Jerome Powell have urged politicians to step back from the brink and lift the limit.

The brewing crisis comes as Democrats fight to pass President Joe Biden's multitrillion-dollar infrastructure and social spending bills, with party infighting fuelling concerns that the president's agenda could end up dead in the water.

"This pantomime must play out, but it seems impossible that the debt ceiling won't be raised," said market.com's Michael Hewson. "A shutdown is possible, however default is unthinkable."

Oil prices extended a recent rally on demand expectations and worries about supplies, with Brent breaking $80 for the first time in three years — briefly touching $80.75 — while WTI was also well up.

"It looks like the oil rally has still got some legs," John Driscoll, at JTD Energy Services, said, adding: "I just don't see any evidence yet that the rally has topped out."

– Key figures around 0810 GMT –

Tokyo – Nikkei 225: DOWN 0.2 percent at 30,183.96 (close)

Hong Kong – Hang Seng Index: UP 1.2 percent at 24,500.39 (close)

Shanghai – Composite: UP 0.5 percent at 3,602.22 (close)

London – FTSE 100: DOWN 0.5 percent at 7,030.88

Brent North Sea crude: UP 0.8 percent at $80.17 per barrel

West Texas Intermediate: UP 1.0 percent at $76.18 per barrel

Dollar/yen: UP at 111.21 yen from 110.01 yen at 2050 GMT

Euro/dollar: DOWN at $1.1688 from $1.1700

Pound/dollar: DOWN at $1.3675 from $1.3704

Euro/pound: UP at 85.47 pence from 85.35 pence

New York – Dow: UP 0.2 percent at 34,869.37 (close)

— Bloomberg News contributed to this story —

dan/leg

BANK OF CHINA

AXA