Asia shares open cautiously higher

Asian share markets got off to a cautious start on Wednesday, after another volatile Wall Street session, as investors braced for the outcome of the Fed’s meeting late in the day and any hints about faster tightening of monetary policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.26 per cent early on Wednesday, but the index has skidded 2.4 per cent this year, and is testing mid-December’s one-year low.

Concerns that the Fed’s expected interest rate hikes could hammer Asia’s equities markets have dragged on the regional benchmark, though moves elsewhere have been even more dramatic.

Globally, US stocks posted their worst week since 2020 last week, and MSCI’s world index is on course for its biggest monthly drop since the COVID-19 pandemic hit markets in March 2020.

Japan’s Nikkei lost 0.8 per cent to hover around its lowest level since December 2020.

The Fed is due to update its policy plan later on Wednesday, likely fleshing out timing for expected rate hikes and shrinking its massive balance sheet.

“Asian markets are currently being affected by volatility in global markets, concerns about Fed tightening in the face of higher inflation and uncertainty about events in Russia and Ukraine,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

Growing tensions as Russian troops massed on Ukraine’s border have added to a risk-averse environment for investors.

“We expect the Fed meeting, however, will not add to volatility. The central bank is set to only finish its quantitative easing in March and while it will signal interest rates are likely to be raised in March too, the Fed will endorse market expectations for quarterly 25bps hikes for its fed funds rate rather than more aggressive tightening this year,” Mohi-uddin added.

Money markets are priced for a first rate hike by the Fed in March, with three more quarter-point increases by year-end.

Fed tightening is putting pressure on some central banks in Asia to follow suit, potentially hurting their equity markets as happened in 2013 when the US central bank began tapering its post financial crisis stimulus.

“As long as turbulence remains relatively contained to equity markets, the bar for the Fed becoming dovish is high,” said analysts at Nomura in a note.

They said they thought some of the Fed’s policy committee would interpret the latest sell off in equities as potentially taking out some of the “froth” in the market, so it would not change their view, especially amid worries about high inflation.

In early trade Wednesday morning, China’s blue-chip index rose 0.4 per cent, while Hong Kong’s Hang Seng Index was up 0.6 per cent.

Hao Hong, Head of Research at BOCOM International, expects limited appetite from investors to hold big positions in Asia after heavy market selling, as the Chinese New Year approaches.

US Treasuries were steady on Wednesday, with yields on two year notes at 1.0273 per cent, holding onto gains made earlier this month. The yield on benchmark 10-year Treasury notes was 1.7814 per cent, a little below the two-year high of 1.9 per cent hit last week.

S&P 500 futures fell 0.13 per cent and Nasdaq futures were flat.

On the previous trading day, the Dow Jones Industrial Average fell 0.19 per cent, the S&P 500 lost 1.22 per cent and the Nasdaq Composite dropped 2.28 per cent.

The dollar index against a basket of major currencies was mostly unchanged, although the US greenback lost some ground against the safe haven yen, which has benefited from a flight to safety in recent months, and the Australian dollar.

US crude fell 0.4 per cent on Wednesday to $US85.26 ($A119.02) per barrel and Brent crude eased 0.16 per cent to $US88.04 ($A122.90) per barrel.

Spot gold added 0.1 per cent to $US1,848.41 ($A2,580.35) an ounce, having hit a two month high overnight as investors sought safety.