Asian stocks slip; Fed's decision day makes investors wary

Asian stocks slipped on Wednesday as investors took profits before a US central bank policy meeting that could signal how much monetary tightening to expect during the remainder of the year, with an immediate rate hike fully priced in by markets.

Though recent data, particularly out of China, has fuelled a rally in Asian equities since the start of the year, investors are expecting more headwinds for emerging markets due to an increasingly hawkish Fed.

“The positive sentiment towards emerging markets is not sustainable as the interest rate differential advantage in Asia's favour is likely to reduce in the coming months,” said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale in Hong Kong.

The MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 per cent after posting its second-biggest daily gain this year in the previous session.

Japan's benchmark Nikkei average was down 0.3 per cent, while stocks in South Korea and Australia declined 0.2 and 0.5 per cent respectively.

Equities have had a good start to the week thanks to positive news out of the region's two economic powerhouses, China and India.

Strong data out of China this week have sparked a fresh rally in Hong Kong stocks, while Indian shares climbed to a record high on Tuesday as investors regarded Prime Minister Narendra Modi's landslide victory in the northern state of Uttar Pradesh as an endorsment for his economic reforms.

A worrying drop in global oil prices, hoever, has cast doubt on how much Asian policymakers are likely to raise interest rates this year to maintain their premium over US rates.

Brent crude has lost more than 11 per cent in the past three weeks despite a 1.2 per cent bounce on Wednesday.

US oil prices jumped in early trading after industry data showed a surprise drawdown in US crude stockpiles. West Texas Intermediate crude was up 1.4 per cent at $48.40 a barrel.

Policy decisions at the Bank of England and the Japanese central bank along side a Dutch election vote within the next 36 hours were further reasons for investors' caution.

Despite the fresh optimism in equities, currency markets were far more circumspect with the US dollar edging higher against major rivals ahead of a much anticipated US Federal Reserve rate hike.

Market attention will be squarely focused on Fed Chair Janet Yellen's comments to gauge the future path of interest rates. The Fed is widely expected to raise its benchmark interest rate later in the global day, although just a few weeks ago such action had beem viewed by markets as unlikely.

The dollar index was a touch higher at 101.70, extending a 0.7 per cent rise in the past two sessions after a bout of profit taking at the end of last week, but it remained within well worn recent ranges.

“Of course, everyone is waiting for the Fed, so we're expecting range-bound trading until we get some clear signals about expectations for the rest of the year,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

Markets are also awaiting a meeting of the Group of 20 finance ministers and central bankers in the German town of Baden-Baden starting on Friday, their first meeting since Donald Trump won the US presidential election.

Gold rose 0.2 per cent to $1200.70 before the Fed decision.