SYDNEY: Asian shares rallied on Wednesday as oil prices paused gains, with markets turning to the U.S. Federal Reserve meeting to see how policymakers will balance growth and inflation risk amid conflict in the Middle East.
Israel intensified its offensive by killing Iran's security chief, while Iran renewed strikes on oil facilities in the United Arab Emirates. A senior Iranian official said the new supreme leader rejected de-escalation offers conveyed by intermediaries, signalling no quick end to a war that has unleashed a global oil shock.
Oil prices took a breather on Wednesday after the Iraqi government and Kurdish authorities reached a deal to resume oil exports via Turkey's Ceyhan port, though the Strait of Hormuz remained largely closed. Brent crude futures dropped 2.2% to $101.09 a barrel while U.S. West Texas Intermediate crude fell 3.3% to $93.05.
That proved to be a comfort for equity investors, with MSCI's broadest index of Asia-Pacific shares outside Japan up 1.6% as South Korea surged more than 4%. Japan's Nikkei also rallied 2.6%.
Chinese blue-chips bucked the trend with a decline of 0.5%.
Natasha Kaneva, head of global commodities research at JPMorgan, said apparent stability in Brent and WTI reflects a temporary buffer created by regional inventory overhang, benchmark composition and policy intervention.
"If the Strait does not reopen ... Brent and WTI will ultimately reprice higher as Atlantic basin inventories are drawn down and the global market is forced to clear at a materially tighter supply level," she said.
S&P 500 futures rose 0.4% and Nasdaq futures gained 0.5%, supported by expectations of strong earnings from chipmaker Micron Technology due later on Wednesday. Investors will be watching for commentary on chip shortages and pricing.
Reports that Nvidia has won Chinese approval to sell its second-most powerful artificial intelligence chips also boosted sentiment.
Over in Europe, EUROSTOXX 50 futures were up 0.6%.
FOCUS TURNS TO FED AND POWELL
After the Reserve Bank of Australia kicked off a busy week for global central banks with an interest rate hike, all eyes are now on the Fed's policy meeting later in the day. Attention will be on updated economic forecasts, especially the "dot plot", where the risk is that it might no longer project any rate cuts at all this year.
The Fed is widely expected to keep its policy steady but the debate will very much centre on whether conflict with Iran is likely to disrupt economic growth, threaten more persistent inflation or create a confounding mix of economic slowing and rising prices.
Fed Chair Jerome Powell will also hold a press conference, and markets will be watching for any hint on whether he intends to remain on the Board as a governor once his term as chair ends in May.
"Consensus still points to the median dot plot showing one 25-basis-point cut for 2026, aligning with current market pricing," said IG analyst Tony Sycamore.
"That said, there's a decent chance the dots could shift more hawkish, perhaps even to zero cuts, if the committee views the oil shock as leading to stickier inflation."
The Bank of Canada also meets on Wednesday where market participants expect no policy change and wager the next move will be up, with one hike fully priced in by year-end.
In currency markets, the U.S. dollar was down 0.2% to 158.7 yen for a third session of decline. The euro held at $1.1541 after rising 0.3% overnight.
Treasuries extended gains, helped by a solid auction of 20-year Treasury bonds. Yields on 10-year Treasury notes fell 2 basis points at 4.1790%, the third session of decline, to move away from a recent peak of 4.29% - Reuters
