By Chuck Mikolajczak
NEW YORK (Reuters) - A rally in major world stock markets lost some steam on Thursday despite a continued surge in bank shares, as investors reassessed positions, while U.S. bond yields continued to climb on the likelihood of inflation under President-elect Donald Trump's proposed fiscal policy.
Investors after the election quickly shifted to focus on Trump's priorities, including tax cuts, an increase in defense and infrastructure spending, and bank deregulation. The expansionary policy is expected to lead to inflation.
After a strong start, stocks in Europe reversed course and turned negative. Europe's index of leading 300 shares was down 0.3 percent after earlier touching a two-week high, with utilities dropping 4 percent. Wall Street also retreated from earlier highs, weighed by a 1.6 percent drop in the technology sector, its biggest decline in two months.
U.S. banking shares, kept the S&P 500 on the plus side as they rallied for a fourth straight session. The sector index surged nearly 4 percent after touching its highest level since May 2008. European bank shares advanced 2.3 percent.
"The Trump campaign did say it would repeal Dodd-Frank. Rates are higher and the yield curve is steeper. Those are all good things for the banks," said Warren West, principal at Greentree Brokerage Services in Philadelphia.
Bond yields continued to climb amid expectations interest rates will rise under increased spending.
Benchmark 10-year notes were last down 23/32 in price, yielding 2.143 percent, up from 2.064 percent late on Wednesday. The yields rose as high as 2.148 percent, the highest since January. The yield on 30-year Treasury bonds rose 38 basis points on the holiday-shortened week for its biggest weekly increase since January 2009.
The Dow Jones industrial average rose 218.25 points, or 1.17 percent, to 18,807.94, the S&P 500 gained 4.22 points, or 0.2 percent, to 2,167.48 and the Nasdaq Composite dropped 42.28 points, or 0.81 percent, to 5,208.80.
The benchmark S&P 500 index pared gains after rising as much as 0.9 percent earlier in the session. MSCI's all-country world index advanced 0.18 percent after rising as much as 0.9 percent.
Stocks on Wall Street had jumped on Wednesday following Trump's stunning win, with companies expected to benefit from his reflationary policies seeing the biggest climb. Bond proxy sectors like utilities and real estate took the brunt of the selling.
The dollar also continued to strengthen and was last up 0.36 percent at 98.856 against a basket of major currencies. The greenback was on track for its fourth straight session of gains.
The strength in the dollar weighed on gold which fell 1.6 percent to $1,257.02.60 per ounce, on track for its third decline in four days. The dollar rise also dragged on oil prices, with both Brent and U.S. crude settling down more than 1 percent.
But copper jumped to a 16-month high of $5,714 a tonne and was last up 3.5 percent at $5,600.85 on expectations of a jump in infrastructure spending under a Trump presidency.
(Additional reporting by Noel Randewich; Editing by Chizu Nomiyama and Meredith Mazzilli)