SINGAPORE: Asian stocks pulled back from two-and-half-year highs on Tuesday and the dollar firmed following comments from Federal Reserve Chair Jerome Powell that scuppered bets of big interest rate cuts, while Middle-East tension kept risk sentiment in check.
Oil prices were steady and gold traded just below a record high touched last week as investors awaited U.S. labour data for more clarity on the pace of U.S. rate cuts.
MSCI's broadest index of Asia-Pacific shares outside Japan was 0.32 per cent lower at 618.87 on Tuesday, below the two-and-a-half-year high of 627.66 touched on Monday.
The index is up 17 per cent so far in the year.
Japan's Nikkei rose nearly 2 per cent on a softer yen after shedding 4.8 per cent on Monday as investors contended with perceived monetary policy hawk Shigeru Ishiba winning a contest to become the country's prime minister.
European stocks were set for a higher open, with Eurostoxx 50 futures 0.25 per cent higher, German DAX futures rising 0.24 per cent and FTSE futures up 0.28 per cent.
The spotlight during European hours will be on the inflation data from the euro zone that could pave the way for the European Central Bank to cut interest rates later in the month.
The data comes after European Central Bank President Christine Lagarde on Monday said the bank was increasingly confident inflation would fall to its 2 per cent target, which would be reflected in its next policy move, a hint at an incoming rate cut.
With mainland China's financial markets closed for the rest of the week, the blistering rally that has buoyed Asian markets in the past week took a breather. Hong Kong's Hang Seng is also closed on Tuesday.
A slew of economic stimulus measures has led to beaten-down Chinese stocks soaring, with the blue chip CSI300 rising 25 per cent since the beginning of last week as global investors prepare to stake bets on China again.
"I think we're in for some choppy trade until U.S. data comes to flow in," said Matt Simpson, senior market analyst at City Index, noting thin volumes with Chinese markets shut.
Investors are also keeping an eye on rising geopolitical tensions after Israel's ground invasion of Lebanon appeared to be getting underway early on Tuesday.
No hurry
Investor focus has centred around the pace of rate cuts from the Fed after the U.S. central bank kickstarted an easing cycle last month with a 50 basis-point cut.
Fed Chair Powell indicated on Monday the U.S. central bank would likely stick to quarter-percentage-point cuts henceforth after new data boosted confidence in economic growth and consumer spending.
"This is not a committee that feels like it is in a hurry to cut rates quickly," Powell said.
That led traders to price in 38 per cent probability of a 50 bp cut next month, versus 53 per cent on Friday, showed the CME FedWatch tool. Traders anticipate 70 bps of easing this year.
The shifting expectations around rate cuts bolstered the dollar, with the dollar index slightly higher at 100.77. The euro was steady at US$1.1142, while the yen fell nearly 0.5 per cent to 144.34 per dollar.
Given the Fed's current focus on the labour market, Tuesday's data on job openings for August and the ISM manufacturing survey for September will be important for rate expectations and the dollar, said economist Kristina Clifton at the Commonwealth Bank of Australia.
"Dollar can remain heavy if this week's data shows the U.S. labour market remains in reasonable shape."
In commodities, oil prices were stable on Tuesday as the prospect of additional supply amid lacklustre global demand growth offset worry that an escalating Middle East conflict could disrupt exports in the key producing region.
Brent crude futures rose 0.11 per cent to US$71.78 a barrel. U.S. West Texas Intermediate crude futures gained 0.07 per cent to US$68.22 a barrel.
Spot gold was 0.31 per cent higher at US2,643.21 per ounce, not far from the record high of US$2,685.42 touched on Thursday. Gold rose 13 per cent over July-September, its best quarterly performance in over four years.