Asia pulls higher as markets on edge ahead of Fed meeting

Asian shares rose in choppy trade on Monday after Chinese markets were hit by soft economic data, while the dollar sagged as investors questioned whether the U.S. Federal Reserve will be confident enough to raise rates for the first time in almost a decade.

But financial spreadbetters predicted more upbeat openings for European bourses, with Britain’s FTSE 100 .FTSE, Germany’s DAX .GDAXI and France’s CAC 40 .FCHI all seen opening up to 0.9 percent higher.

“European equities are set to start with modest gains this morning off the back of mild gains in the U.S. on Friday,” Jonathan Sudaria, dealer at Capital Spreads, said in a note.

“Given the size of the looming risk event this week, barring some epic black swan event, it’s going to be very difficult to nudge markets out of this very well-worn groove until we’ve heard what the Fed has to say on the future of monetary policy,” he said.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.3 percent in afternoon trading, after spending much of the session wavering between positive and negative territory.

Chinese shares slipped after disappointing data over the weekend, with the CSI300 index .CSI300 and Shanghai Composite Index .SSEC down 3.2 percent and 3.1 percent, respectively.

Growth in China’s investment and factory output missed forecasts in August, raising the chances that China’s third-quarter economic growth may dip below 7 percent for the first time since the global crisis.

“China’s economy faces relatively big downward pressure, so investor sentiment remains weak,” said Gu Yongtao, strategist at Cinda Securities.

U.S. stock futures ESc1 pared earlier gains but were still up about 0.1 percent from late U.S. levels in Asian trade, building on Friday’s solid daily and weekly gains on Wall Street.

But Japan’s Nikkei stock index .N225 erased an early rise and ended down 1.6 percent.

Ahead of the U.S. Federal Reserve’s policy meeting on Wednesday and Thursday, the Bank of Japan’s own two-day meeting will wrap up on Tuesday. Policymakers are widely expected to hold steady, despite increasing evidence that Japan’s inflation and growth remain in the doldrums.

“The majority of investors do not expect a policy change for now, but there is a slight expectation that the bank will ease some time soon,” said Chihiro Ohta, general manager at investment research and investor services at SMBC Nikko Securities, adding the market will scan BOJ Governor Haruhiko Kuroda’s post-meeting speech for policy clues.

Slowing demand from China was likely to keep a lid on commodity prices.

China’s output of key industrial commodities including coal and steel weakened in August, as government measures to prevent smog from affecting World War Two commemorations further cut production already lowered by a slowing economy.

Influential Wall Street trader Goldman Sachs cut its outlook on oil late last week, lowering its 2016 forecast for U.S. crude to $45 a barrel from $57 previously, citing oversupply and concerns over China’s economy.

The investment bank said crude could even fall to near $20 a barrel.

U.S. crude futures reversed earlier gains in Asian trade, skidding about 0.4 percent to $44.47 CLc1, after losing 3.0 percent last week. Brent crude LCOc1 tumbled 0.9 percent to $47.70.

ALL EYES ON FED

Trade in most asset classes could be subdued as investors assess the probability of the Fed finally implementing its long-awaited increase in interest rates.

A small majority of forecasters are sticking to their guns and predicting the Fed will pull the trigger on the first U.S. interest rate increase in nearly a decade.

Currency speculators raised bullish dollar bets for the first time in about a month in the week ended Sept. 8, according to Reuters calculations and the latest figures from the Commodity Futures Trading Commission, suggesting that some investors were betting on or hedging against a stronger greenback ahead of the Fed meeting.

But overall, traders are pricing in a smaller chance of a rate hike, suspecting the Fed may tread cautiously given the sharp falls in equity markets and commodities in recent weeks, as well signs of slacking global growth.

“We think it is almost 50-50 whether the Fed will raise rates this week but we expect a rate hike by December on the grounds that the U.S. economy is pretty strong,” said Fumio Nakakubo, Japan CIO at UBS’s wealth management division.

In the currency market, the dollar edged down against major currencies, with the dollar index .DXY giving up about 0.1 percent to stand at 95.140.

Against the yen, the greenback traded at 120.37 yen JPY=, down about 0.2 percent from late U.S. trade on Friday, while the euro was flat at $1.1335 EUR=, holding on to last week’s 1.8 percent gain.

Source: Reuters