Asian stocks edge lower with Fed decision in focus

[SINGAPORE] Asian stocks slipped at the open, tracking declines on Wall Street as investors rotated out of technology shares and positioned for the first US Federal Reserve policy decision under chairman Kevin Warsh.

MSCI’s gauge of regional equities was down 0.1 per cent after a three-day rally, with South Korea’s chip-heavy Kospi benchmark losing 0.6 per cent. That’s after a pullback in semiconductor makers weighed on US equities, dragging the S&P 500 0.6 per cent lower and sending the Nasdaq 100 down almost 2 per cent.

Meanwhile, SpaceX extended its post-IPO surge to nearly 50 per cent, overtaking Amazon.com to become the world’s fifth-largest company by market value.

Brent crude edged higher early on Wednesday after sliding about 5 per cent to end below US$79 in the previous session. Recent declines in oil prices have helped ease concerns that energy costs may reignite inflation, prompting investors to reassess the outlook for interest rates.

“For markets, a ‘higher-for-longer’ rate backdrop, rather than a renewed tightening cycle, can remain supportive of valuations, in our view, particularly if it reflects resilient economic growth alongside gradually moderating inflation pressures,” said Mona Mahajan at Edward Jones.

With a well-flagged hike from the Bank of Japan seen as an exception, most developed-world central banks, including the Fed, are expected to make no changes this week. The bigger focus for investors is what the policy outlook looks like under Warsh.

Bloomberg Economics sees a shift in how the Fed communicates with markets as Warsh is unlikely to submit his own “dot” to the closely scrutinised dot plot, breaking with precedent under Jerome Powell, Janet Yellen and Ben Bernanke.

“In a matter of months, the narrative has shifted from ‘how many rate cuts this year?’ to ‘how many rate hikes are on the table?’” said Bret Kenwell of eToro. “That’s a big swing, and it puts Warsh in a difficult spot: He can acknowledge the recent pullback in oil prices and sound patient, but he cannot afford to look complacent if broader inflation pressures are moving the wrong way.”

Options traders are increasingly divided over the Fed’s near-term rate path, with conflicting bets that span from cuts to various degrees of hikes over the coming months.

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Policy forecasts from Wall Street strategists also run the gamut. US asset manager PGIM this week said that the Fed will raise rates three times this year, while Citigroup’s Andrew Hollenhorst has said that the central bank will cut rates this year. BNP’s recent call is for three rate hikes starting in December.

While benchmark oil prices reached their lowest levels since early March, Treasury yields remained above Monday’s lows, even after a 20-year bond auction. On the day, they were down by two to five basis points across maturities, with those on 30-year bonds leading the declines.

“In the short run, oil prices are down a lot, but the market is trying to decide what’s more important – the short term or the unclear impact on inflation in the long run,” said David Robin, an interest-rate strategist at TJM Institutional Services. “The absence of an answer is limiting the impact of oil prices on the rates market.”

Meanwhile, the US and Iran are preparing to formally sign an interim peace deal that’s left both sides claiming victory, with details of the accord still emerging and leaving many European governments, energy investors and shipping companies with reservations about how fast the Strait of Hormuz can return to pre-war conditions.

“We still expect the recovery in shipping and Gulf production to take time and, as temporary buffers fade, current price optimism to unwind, leading to higher prices and more volatility ahead,” Sian Fenner, head of business and industry economics at Westpac Banking, wrote in a note.

Elsewhere in markets, gold and silver edged higher while Bitcoin saw a marginal decline. BLOOMBERG