Asia stocks capped ahead of Fed, oil on defensive

By Shinichi Saoshiro

TOKYO (Reuters) – Investor caution ahead of the Federal Reserve’s interest rate meeting capped Asian stocks on Tuesday, while crude oil prices retreated as global growth worries overshadowed supply concerns stemming from recent Middle East tensions.

MSCI’s broadest index of Asia-Pacific shares outside Japan inched up 0.05%.

Australian stocks added 0.1% while Japan’s dipped 0.05%.

The Fed, facing fresh demands by U.S. President Donald Trump to cut interest rates, begins a two-day meeting later on Tuesday. The central bank is expected to leave borrowing costs unchanged this time but possibly lay the groundwork for a rate cut later this year.

Fresh hopes for looser U.S. monetary policy have been a tonic for risk assets markets, which were buffeted last month by an escalation in the trade conflict between Washington and Beijing. The has gained 5% this month after sliding in May on trade war fears.

Focus is now on how close the Fed could be to cutting interest rates amid the raging U.S.-China trade war, signs of the economy losing steam and pressure by President Trump to ease policy.

“The FOMC (Federal Open Market Committee) meeting is the week’s biggest event so there will be a degree of caution prevailing in the markets,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui DS Asset Management.

“Expectations for a rate cut in July have increased significantly, so the markets could experience disappointment if the Fed does not send strong signals of impending easing.”

U.S. Treasury yields dipped on Monday after the New York Fed’s “Empire” gauge of business growth in the state showed a fall this month to its weakest in more than 2-1/2-years, fanning rate cut expectations.

The against a basket of six major currencies stood little changed at 97.507 after pulling back from a two-week high on the decline in Treasury yields.

The pound traded at $1.2542 after retreating overnight to a six-month low of $1.2532 on Monday on concerns that arch-Brexiteer Boris Johnson will replace Theresa May as prime minister.

The euro was a shade higher at $1.1224 after spending the previous day confined to a narrow range.

oil futures shed 0.08% to $51.89 per barrel after retreating 1.1% the previous day.

Oil prices had slipped on Monday as weak Chinese economic data released at the end of last week led to fears of lower global demand for the commodity. [O/R]

Concerns over weakening demand overshadowed tensions in the Middle East, which remained high following last week’s attacks on two oil tankers in the Gulf of Oman.

(This story has been refiled to correct typographical error in paragraph 5)