Asia slips before Fed, Aussie drops on soft inflation

TOKYO (Reuters): Asian stocks slipped on Wednesday but losses were capped by caution ahead of a US Federal Reserve policy decision later in the day.

Spreadbetters expected a subdued start for European shares as well, forecasting Britain’s FTSE, Germany’s DAX and France’s CAC would open a touch higher.

The Fed is expected to keep interest rates unchanged this week and may struggle to convince skeptical investors it can tighten monetary policy before the end of the year in the face of US and global economic headwinds.

MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.9%.

Hong Kong’s Hang Seng fell 0.6%, South Korea’s Kospi dropped 0.4% and Shanghai stocks lost 0.7%.

Finance and insurance stocks again weighed on Chinese indexes, as investors continued to digest weak bank earnings and deposit rate liberalisation. China stocks, however, for now shrugged off US-China tensions over naval patrols in the South China Sea.

Tokyo’s Nikkei bucked the trend and rose 0.6% on bargain hunting following the previous day’s fall.

On Wall Street, the Dow fell 0.2% and the S&P 500 retreated 0.3%.

Closely watched earnings from Apple Inc late on Tuesday painted a rosy picture for the new iPhones, but a quarterly slowdown of overall sales in China cast doubt on the robustness of Apple’s legendary profitability.

Apple shares initially rose after hours as it beat sales and profit forecasts, but they gave up those gains later as concerns crept in.

In currencies, the Australian dollar dropped to a 3-week low after soft Australian inflation data paved the way for a further interest rate cut, possibly as soon as the central bank’s Nov. 3 policy meeting.

You have to say data like this coupled with what the banks have done recently with the tightening up in conditions must increase the risk of a move before year end, said Su-Lin Ong, a senior economist at RBC Capital Markets. She was referring to Australia’s major banks raising their variable mortgage rates to offset more stringent regulatory capital requirements.

The US dollar moved in narrow range against the yen and euro as traders awaited the Fed’s statement at 1800 GMT.

No one expects the Federal Reserve to hike on Wednesday and we would not be surprised if they refrained from providing any clear signal about their intention to raise interest rates before the end of the year, wrote Kathy Lien, director of FX strategy for BK Asset Management.

The focus fell on the Fed’s stance after the European Central Bank opened the door last week for more easing and China cut rates and banks’ reserve requirements.

While it can be argued that stimulus abroad is good for US markets and makes it easier for the Fed to raise interest rates in December, the reasons why these central banks are easing and the consequences for the dollar could also deter them from tightening, said BK Asset Management’s Lien.

The dollar was steady at 120.45 yen while the euro inched down 0.1% to $1.1034.

Commodity currencies like the Canadian dollar were hit by a slide in crude oil prices. The dollar was steady at C$1.3275 after surging 0.9% overnight.

The Australian dollar struggled near a 3-week low of $0.7112, having lost about 1% on the day.

US crude oil edged up to $43.24 a barrel after sliding 1.7% overnight to a two-month low, ahead of official inventories data later in the session that are expected to confirm a persistent supply glut dogging the market.

Brent crude was little changed at $46.81 a barrel following a 1.5% decline overnight to a mid-September low.