Investors sought safer assets after China threatened repercussions if Pelosi visited the self-ruled island, which Beijing claims as its territory.

US long-term Treasury yields dropped to a four-month low, while eurozone bond yields fell. The Japanese yen was on track for a fifth straight day of gains versus the dollar.

The greenback also gained against a basket of currencies, while crude oil sank as investors worried over signs of a global manufacturing downturn.

The MSCI world equity index, which tracks shares in 47 countries, fell 0.5 percent. The broad Euro STOXX 600 shed 1 percent, deepening losses during morning trade.

Wall Street stocks were set to fall around 0.8 percent, futures gauges showed.

Pelosi was expected to arrive in Taipei later on Tuesday, with several Chinese warplanes flying close to the median line dividing the Taiwan Strait, a source told Reuters.

China has repeatedly warned against Pelosi going to Taiwan. Washington said on Monday it would not be intimidated by China.

"It's all about the Taiwan threat," said Robert Alster, chief investment officer at Close Brothers Asset Management. "There's no way you can say it's not moved up the geopolitical agenda."

The Taiwan issue added to a sense of unease sparked by China, Europe and the US on Monday reporting weakening factory activity, with that in the US decelerating to its lowest level since August 2020.

The benchmark 10-year US Treasury yield fell as low as 2.52 percent, its lowest in four months, also benefiting from bets a slowdown could spur the Federal Reserve to ease off the policy-tightening pedal.

 

Recession fears

Germany's 10-year government bond yield fell 4.5 basis points to 0.72 percent, after hitting its lowest since early April. The fall has come as investors scale back expectations for European Central Bank rate hikes on recession fears.

Brent futures edged down to US$99.14 a barrel after losing almost $4 overnight. US West Texas Intermediate futures also eased to $92.94, extending Monday's almost $5 slide.

MSCI's broadest index of Asia-Pacific shares retreated 1.3 percent. Taiwan's stock index dropped 1.6 percent, while Chinese blue chips tumbled 2 percent.

The flight for safety played out in currency markets, too.

The US dollar slid to as low as 130.40 against the Japanese yen, a level not seen for almost two months. It was last down 0.5 percent. Against a basket of currencies, the dollar rose 0.3 percent to 105.62.

The Taiwan dollar slipped to its lowest level in more than two years on the weaker side of 30 per US dollar.

Australian stocks pared declines and the Aussie dollar weakened after the central bank raised the key rate by an as-expected 50 basis points, with markets interpreting changes to the accompanying policy statement as dovish.

The Aussie dollar 1.4 percent to $0.69910, extending a retreat following the Reserve Bank of Australia's move.

"The Aussie has been underperforming other major currencies lately given global growth concerns, so it really needed a hawkish surprise to reignite its recovery from two-year lows," said Sean Callow, a currency strategist at Westpac in Sydney.

"Instead, it got the RBA leaving the door wide open to slowing the pace of tightening at future meetings."

Cryptocurrencies, a barometer for risk appetite, also fell, with Bitcoin slipping 1.6 percent to $22,896.