World stocks fell from this week's 29-month high on Wednesday as China's interest rate rise prompted investors to book profits, while general optimism over global growth sent 10-year U.S. bond yields to nine-month highs.
China raised interest rates on Tuesday for the second time in just over six weeks, intensifying a battle against inflation.
Monetary tightening in the world's second biggest economy, if aggressive, could potentially put a brake on global growth and weigh on equities and commodities. But investors remained confident China's proactive but gradual stance will not derail the global recovery.
In the short term, the rate hike gave investors an excuse to consolidate their positions after the benchmark world index rallied nearly 4 percent since the start of the year.
They are also cautious before Federal Reserve chairman Ben Bernanke testifies on the economy later, when he might give clues on the outlook for U.S. interest rates.
China is turning its focus toward inflation, rather than growth, said Adam Myers, senior currency strategist at Credit Agricole CIB. What this means is that growth is likely to continue. The MSCI world equity index <.MIWD00000PUS> fell 0.3 percent, having hit its 29-month peak on Tuesday.
The Thomson Reuters global stock index <.TRXFLDGLPU> was down 0.2 percent.
The FTSEurofirst 300 index <.FTEU3> was steady on the day.
Emerging stocks <.MSCIEF> fell nearly one percent while Shanghai shares <.SSEC> dropped 0.9 percent.
U.S. crude oil rose 0.7 percent to $87.56 a barrel while London crude prices jumped above $100 due to tighter North Sea supplies.
The bund future fell 24 ticks while yields on 10-year U.S. Treasuries climbed as high as 3.77 percent, their highest since late April, as investors anticipated economic improvement and rising inflation.
The dollar <.DXY> ticked lower against a basket of major currencies while the euro rose 0.1 percent to $1.3645.
We suspect that higher U.S. yields should be supportive for the dollar eventually as the U.S. economy continues recovering and as the threat of global food inflation lingers over the longer term, Citi said in a note to clients.
Federal Reserve Chairman Ben Bernanke said last week that the U.S. economy still needs the Fed's help -- a stance many traders expect him to repeat when he speaks on Wednesday.
(Additional reporting by Anirban Nag; Editing by Catherine Evans)