Asian stocks steady as traders await Fed decision

Asian equities remained relatively stable as traders anticipated the US Federal Reserve's interest rate decision, with elevated oil prices and rising bond yields keeping investors cautious. The MSCI's Asian equities index gained 0.1 per cent. Wall Street indices edged higher in early trading, buoyed by OpenAI's new funding round valued at US$1.2 trillion.

However, the S&P 500 and Nasdaq 100 retreated on Tuesday, while a gauge of chipmakers registered a slight increase. Among notable market movements, the S&P 500 futures rose 0.1 per cent at 9:09 am Tokyo time, while Hang Seng futures climbed 0.3 per cent, Japan's Topix increased by 0.6 per cent, and Australia's S&P/ASX 200 advanced 0.2 per cent.

Supporting the market's sentiment, US crude oil declined by 0.6 per cent to US$105.15 a barrel, following a surge of over 20 per cent this month. The surge in energy prices and expectations of a Fed rate hike fueled a sell-off in bonds, pushing the 10-year Treasury yield to a high of 5.04 per cent, the highest in nearly two decades, before settling at 5 per cent. Treasury futures stabilized, and government bonds opened higher in Australia and New Zealand.

Bitcoin continued its decline, trading near US$75,600 as the US Senate thwarted a significant cryptocurrency market structure bill. The Federal Reserve's decision on Wednesday (Sep 16) garnered significant attention due to higher-than-expected core inflation and budgetary concerns, which heightened expectations of the first rate increase since 2023.

Market participants priced in a more than 90 per cent probability of a hike, indicating tighter financial conditions due to the surge in energy and borrowing costs affecting equities.

Chris Senyek from Wolfe Research stated, "If the Fed follows the futures market and hikes rates, our sense is that stocks are likely to see downward pressure in the near term." However, he emphasized that over a longer horizon of six to 12 months following the first rate hike, stocks typically recover and enter positive territory.

Three major central banks convened this week, with the Fed followed by policy decisions from the UK and Japan, potentially reshaping the monetary policy outlook for the remainder of 2026. The decision to hold rates or to hike without clear guidance on future increases could prompt investors to demand higher long-term yields to protect against inflation, while shorter-dated yields would closely track the Fed's policy trajectory.

Higher interest rates and elevated oil prices were likened to equities running a marathon with ankle weights, as Darrell Cronk from Wells Fargo Investment Institute explained. "Higher rates increase the discount rate investors apply to future earnings, while higher energy costs drain consumer purchasing power and pressure profit margins."