Equity and bond prices fell as market sentiment was dampened on Tuesday by expectations that the US Federal Reserve will hike official interest rates at next week?s meeting. Futures on benchmark US stock market indices showed New York was expected to open little changed.

The yen was up against the dollar and euro on hopes that upcoming Japanese economic data would confirm the improving economic outlook and prompt the Bank of Japan to end its ultra-easy interest rate policy.

Overall, markets are focussed on the US central bank?s meeting on June 29-30, US June jobs data on July 2 and the handover of power in Iraq on June 30.

?Stock, bond and currency markets go into a temporary void until next week?s FOMC rate decision and the June US employment report, which will provide the next key directional trading signals,? said David Brown economist at Bear Stearns.

On currency markets the yen was strong as speculation simmered that the Bank of Japan, which has kept short-term rates near zero for most of the past five years, could end that policy sooner than expected.

The dollar eased 0.4 percent against the yen to around 108.4 and the euro fell 0.5 percent to around 131.20 yen.

?The strong performance of the Japanese economy has triggered the discussion on when the BoJ will start to review its current quantitative easing stance,? said BNP Paribas in a research note. The euro was down about 0.1 percent against the dollar at around $1.2090.

US equity markets slipped on Monday and on Tuesday Japanese stocks followed as traders fretted about exports to the United States, which could stall if consumers react badly to a Fed rate hike.

The Nikkei average finished at the day?s high of 11,581.27, down 0.16 percent and the broader TOPIX index lost 0.25 percent to 1,162.31.

Consensus on 0.25 % rise

In Europe, the FTSE Eurotop 300 index of pan-European blue chips was down 0.6 percent and the narrower DJ Euro Stoxx 50 index lost 0.5 percent.

Economists forecast the US central bank will raise rates by a quarter percentage point, from 46-year lows of one percent.

?The consensus is a 0.25 percentage point rise (in US interest rates), and the possibility of a 0.5 point increase looks almost nil,? said Tatsuyuki Kawasaki, director of equities trading at Kaneyama Securities.

That expectation, reinforced by signs of rising inflationary pressures in the United States, has driven equity and bond prices lower in recent weeks as markets priced in the possible damage to global economic and corporate earnings growth.

In the euro zone too, central bankers are warning about rising inflation expectations and price pressures in the pipeline from record high oil prices.

Higher interest rates in the United States and possibly in the euro zone are two factors behind rising euro zone government debt yields. Another is new debt issues from Germany.

The interest-rate sensitive two-year Schatz yield was up 1.9 basis points at 2.701 percent and the 10-year Bund yield was up 2.7 basis points at 4.360 percent.

The bond market shrugged off the German Zew institute?s survey of investor confidence in Germany, Europe?s largest economy, which rose for the first time this year to 47.4 points in June from 46.4 points in May.

The yield on the 10-year benchmark Treasury bond was up 1.89 basis points at 4.7046 percent .

Oil prices steadied following a three percent slide on Monday as an expected rise in US inventories added to a soft tone in the market after Iraq resumed limited crude exports from its key southern terminals.

US crude was down four cents at $37.59 a barrel and London Brent was up two cents at $35.15 a barrel.

Contribution by HSBC