Asian shares and the dollar were on tenterhooks on Tuesday as the Federal Reserve prepared to review rates later in the day, with financial markets focused on how the Fed steers monetary policy in the wake of Republican Donald Trump’s surprise election win last month.
Crude oil prices pulled back after their surge to 18-month highs, while a raft of China data sent mixed signals and had little impact across asset markets.
CMC Markets chief market analyst Michael Hewson expects European bourses to post opening losses, and said U.S. investors “adopted a safety-first attitude” as the Fed meeting looms.
“Markets in Asia appear to have picked up on the slightly softer theme from yesterday, and this could well translate into a softer open in Europe this morning,” Hewson said.
CMC expected Germany’s DAX and Britain’s FTSE to open lower.
MSCI’s broadest index of Asia-Pacific shares outside Japan was nearly flat in late afternoon trading, while Japan’s Nikkei stock index shrugged off losses as the yen pulled off its highs and managed to end 0.5 percent higher.
The Fed is widely expected to hike interest rates for the first time in 2016 at its two-day meeting, with markets pricing in a nearly 100-percent chance of a quarter percentage point increase to the Fed’s target range of 0.25 to 0.50 percent.
What matters most to investors is the Fed’s statement and economic projections, which will be examined for any signs of reaction to Donald Trump’s surprise victory.
“The big question is what sort of pace can we expect from the Fed for next year?” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
U.S. Treasury yields have recently spiked on expectations that the Trump administration will enact policies to spark growth and inflation. In addition to these expectations, surging crude oil prices have also stoked inflation expectations.
On Monday, the yield on benchmark U.S. 10-year notes touched 2.528 percent, its highest since Sept. 29, 2014. It stood at 2.473 percent on Tuesday.
Higher yields in turn lifted the dollar, which climbed as high as 116.120 yen on Monday, its highest since early February. It was last up 0.2 percent at 115.28 yen, above a session low of 114.73.
“Many Japanese importers are far behind in dollar buying, so they would like to buy on dips,” Ogino said.
The euro was nearly flat at $1.0635, while the dollar index, which tracks the greenback against a basket of six rival currencies, edged slightly lower to 101.010.
China posted its strongest retail sales growth of the year in November, data showed on Tuesday, while surging steel production lifted factory output though private investment began to slow again, leaving the economy more reliant on state spending and mounting debt.
Crude oil prices came off their highs after surging on Monday to their highest since mid-2015 on the back of a weekend deal by OPEC and non-OPEC producers to curtail output.
U.S. crude futures slipped 0.3 percent to $52.66 a barrel, while Brent crude, the international benchmark for oil prices, was down 0.3 percent at $55.55.
Spot gold inched lower to $1,161.01 an ounce, but remained above 10-month lows hit on Monday as U.S. Treasury yields came off their highs and the U.S. dollar fell ahead of the Fed meeting.