SINGAPORE: Asian stocks fell while the dollar was steady on Tuesday ahead of an expected rate cut from the Federal Reserve this week as investors fretted about where U.S. rates may head next year amid concerns about a divided central bank.
Investor sentiment remained cautious in a wobbly start to the week with key central bank meetings as markets look for a clearer picture of the outlook for global interest rates.
The Reserve Bank of Australia held rates steady as expected on Tuesday, ruling out further policy easing and warning the next move could be up if inflation pressures prove to be stubborn. That pushed the Australian dollar to trade just shy of a near three-month high.
The Swiss National Bank and Bank of Canada are all expected to hold rates steady this week, while the Federal Reserve is widely expected to lower borrowing costs on Wednesday.
The spotlight though is on what comes after the Fed's December rate cut, with bond investors positioning for a shallow U.S. easing cycle and many Wall Street banks predicting fewer Fed interest rate cuts in 2026 on lingering inflation concerns and expectations of a more resilient U.S. economy.
MSCI's broadest index of Asia-Pacific shares outside Japan was 0.65% lower after a weak overnight session on Wall Street. European futures pointed to a subdued open as an air of caution gripped markets.
"The low-hanging fruit from risk management cuts is likely over and Chair (Jerome) Powell's presser is likely to convey a more cautious approach going forward regarding additional policy recalibration," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.
"The dot plot is likely to show one cut in 2026. In the instance the dot plot shows two cuts for next year this would be dovish."
Traders are pricing in 77 basis points of easing by the end of next year, according to LSEG data.
While a rate cut is broadly expected, some strategists think the Fed's policy committee could be sharply divided.
The meeting will also be held amid heightened market interest on who will succeed Powell as Fed Chair when his term ends in May next year. White House Economic Adviser and top contender for the Fed Chair role Kevin Hassett said in an interview that the Fed should continue to lower interest rates.
Xiao Cui, senior U.S. economist at Pictet Wealth Management, expects solid growth, above-target inflation, and a slowing labour market to increase internal divisions at the FOMC and make 2026 a particularly challenging year for policymakers.
"We see risks that Fed cuts are delayed into the second half of 2026."
Asian chip stocks wobbled after U.S. President Donald Trump said the United States will allow Nvidia's H200 processors, its second-best artificial intelligence chips, to be exported to China and collect a 25% fee on such sales. China's CSI Semiconductor Industry Index was down 0.5% while the broader CSI300 index was down 0.47%.
In currencies, the dollar was steady on Tuesday. The euro last bought $1.1649 while sterling was 0.11% higher at $1.3336. The Aussie was 0.33% higher at $0.6646, hovering near the highest level since mid-September after RBA Governor Michele Bullock flagged risks of a move up in rates due to inflationary pressures.
The yen was little changed at 155.91 per dollar after weakening immediately in the wake of a powerful earthquake that rocked Japan. Japanese authorities lifted tsunami warnings on Tuesday hours after a 7.5-magnitude earthquake shook northeastern regions, injuring at least 30 people and forcing about 90,000 residents to evacuate their homes.
In commodities, oil prices extended losses after diving 2% in the previous session as market participants kept a close eye on peace talks to end Russia’s war in Ukraine.
Brent crude futures were 0.3% lower at $62.32 a barrel. U.S. West Texas Intermediate crude was at $58.64, down 0.41%. - Reuters
