* Asian shares drop after 3-day gains, China liquidity a concern
* European stocks seen steady to softer
* U.S. bond yields jump on expectations of big govt borrowing
* Volatility index falls to regular levels
* Oil at 1-year high on OPEC+ production cut, U.S. inventories
By Hideyuki Sano
TOKYO, Feb 4 (Reuters) - Stocks dipped on Thursday as a spike in short-term Chinese interest rates fanned worries about policy tightening in the world's second-largest economy, although improving corporate earnings and easing market volatility helped stem losses.
U.S. bonds extended their decline, boosting the 30-year yield US30YT=RR to its highest level since March, following stronger economic data and a push in Washington to pass a massive relief plan.
European stocks are expected to be steady to slightly weaker, with Eurostoxx futures STXEc1 down 0.2% and FTSE futures FFIc1 up 0.1%.
MSCI's ex-Japan Asian-Pacific index fell 1.2% .MIAPJ0000PUS , led by drops in South Korea and China, while Japan's Nikkei .N225 lost 1.1%, both snapping a three-day winning streak. U.S. stock futures ESc1 slipped 0.25% in Asia.
A rise in Chinese short-term interest rates CN7DRP=CFXS SHIBOR= spooked risk assets, though analysts also noted position adjustments ahead of the Lunar New Year starting next week are likely to play a role too.
"There's persistent speculation that the Chinese authorities may want to tighten its policy," said Wang Shenshen, senior strategist at Mizuho Securities.
Higher interest rates raised worries Chinese policymakers may be starting to shift to a tighter stance to rein in share prices and property markets.
On Wall Street, the S&P 500 .SPX gained 0.10% while the Nasdaq Composite .IXIC lost 0.02%. The NYSE Fang+ index of leading tech giants .NYFANG hit an intraday record high, thanks to 7.4% gain in Google parent Alphabet (NASDAQ:GOOGL) GOOG.O following its strong earnings. on the whole have calmed significantly in the past few days with the Cboe Volatility index .VIX slipping to its lowest levels in over a week.
As the retail trading frenzy seen last week faded, stock prices of GameStop (NYSE:GME) GME.N and other social media favourites subsided, while silver XAG= also extended losses, having already wiped out gains made on Monday.
Expectations of a large U.S. stimulus package underpinned risk assets as the Democratic-controlled Congress sought to pass President Joe Biden's $1.9 trillion COVID-19 relief package without Republican support. it is unclear how much compromise the Democrats are willing to make with Republicans who are calling for a smaller package, many investors expect additional spending of at least $1 trillion.
"Either way, U.S. stimulus will push economic growth even higher after the first quarter and buoy risk market sentiment globally," said John Vail, chief global strategist at Nikko Asset Management.
U.S. bonds reacted strongly to the possibility of bigger borrowing, with the 30-year bond US30YT=RR last up 2.2 basis points at 1.935%, a level last seen in late March.
The benchmark 10-year yield US10YT=RR rose to as high as 1.151%, edging near 10-month high of 1.187% marked in January.
In the currency market, rising U.S. yields helped the dollar against its peers, with its index =USD staying near its highest levels in about two months.
In addition, some market players say the U.S. lead in vaccinations over other nations is starting to boost the prospects of an earlier U.S. economic recovery, helping the dollar.
Against the yen, the dollar hit a near-three-month high of 105.19 JPY= .
The euro lost 0.15% to $1.2014 EUR= , having hit a two-month low of $1.2004 overnight.
The common currency failed to capitalise on improved sentiment in Italy after former European Central Bank chief Mario Draghi accepted the task of trying to form a new government in the country. XAU= also fell 0.8% to $1,819.0 per ounce.
Oil markets continued to advance after the OPEC+ alliance of major producers stuck to a reduced output policy and as U.S. crude stockpiles fell to their lowest since March last year.
U.S. crude CLc1 rose 0.79% to $56.13 per barrel and Brent LCOc1 gained 0.74% to $58.89. Both stood near their highest levels in about a year.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Global assets
http://tmsnrt.rs/2jvdmXl Global currencies vs. dollar
http://tmsnrt.rs/2egbfVh Emerging markets
http://tmsnrt.rs/2ihRugV MSCI All Country World Index Market Cap
http://tmsnrt.rs/2EmTD6j
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>