Asian stocks inch higher at the start of Fed week

The subdued tone in markets reflected increasing investor caution over the durability of this year’s AI-driven rally, with global equities hovering near October’s record highs.

Stocks in Asia edged up on Monday as traders prepared to navigate a heavy slate of central bank decisions this week while also assessing the broader outlook for risk assets heading into the new year.

MSCI Inc.’s gauge of Asian equities was up 0.2% after two straight weeks of gain and in line with the advance in US stock index futures. The Nikkei 225 fell 0.2%. Japan’s economy shrank in the three months through September, the government confirmed in a revised report on Monday, while signs emerged over the weekend that the nation’s relations with China were deteriorating.

With traders already having priced in a 25-basis point interest-rate cut by the Federal Reserve this week, markets have been moving in tight ranges for a lack of fresh catalysts. A gauge of global equities has continued to hover near an all-time high reached in October as investor caution over the durability of this year’s AI-driven rally persists.

“The FOMC meeting will be the headline risk event,” Chris Weston, head of research at Pepperstone Group, wrote in a note. “A 25 basis-point cut is fully priced and viewed as a done deal, but the real debate centres on what a ‘hawkish cut’ looks like and whether the statement and Powell’s press conference aligns to that well-subscribed outcome.”

Central banks spanning Australia to Brazil and the Philippines will also be announcing rate decisions this week, just as renewed inflation pressures prompt a reassessment of 2026’s monetary outlook.

China-Japan relations and assets in both countries were a focus in Asia after a Chinese fighter aircraft over the weekend trained fire-control radar on Japanese military jets for the first time.

Japan’s gross domestic product fell at an annualized pace of 2.3% in the third quarter, as revised figures showed business spending and housing investment came in weaker than preliminary figures. The contraction was deeper than the initial reading of a 1.8% fall, and was the first in six quarters.

Traders will also be keeping a close eye on Chinese trade data for November to help gauge the health of the economy and the impact from modest US tariff relief. Trade Representative Jamieson Greer at the weekend said China has been complying with the terms of the bilateral trade agreements so far.

Meanwhile, French President Emmanuel Macron warned that the European Union may be forced to take “strong measures” against China, including potential tariffs, if Beijing fails to address its widening trade imbalance with the bloc.

A gauge of the dollar edged lower on Monday, after capping its fourth weekly decline in five on Friday. Elsewhere, silver wavered near a record and gold rose as China’s central bank added to its bullion reserves for a 13th straight month in November. Oil steadied as traders monitored India’s buying of Russian crude and Ukrainian attacks on its neighbor’s energy infrastructure.

‘Ripping Through’

On Friday, the S&P 500 Index rose 0.2% to inch closer to a record high as a dated reading of the Fed’s preferred inflation gauge met expectations. Treasuries declined, pushing the 10-year yield up four basis points to 4.14% and closing out their worst week since April, after conflicting economic data cast fresh uncertainty on the scale of potential Fed rate cuts next year.

Treasury yields may extend their rise, possibly toward 4.5%, on the back of an impending fiscal boost from President Donald Trump’s earlier spending bills, strong growth and “the broader reflationary momentum now ripping through global long-end bond yields,” Tony Sycamore, an analyst at IG Markets in Sydney, wrote in a note. “While we think this is likely more of a story for 2026, a rise of this magnitude could impact equities if it unfolds rapidly.”

This week’s auctions of three-, 10- and 30-year government debt are slated to begin Monday, a day earlier than usual to avoid coinciding with the Dec. 10 Fed announcements. Australia is set to reopen a bond line maturing in 2054 just as the 10-year yield hits the highest since Nov. 2023.

The US continues to clear the data backlog with the delayed JOLTS reports scheduled for release. Weekly jobless claims and the employment cost index are also due. Besides the Fed rate decision, economists expect the Bank of Canada, Swiss National Bank and Reserve Bank of Australia will leave their respective policy rates on hold this week.

While the Fed is likely to cut on Wednesday, “the rate path for 2026 is more uncertain as members balance lingering price pressures from tariffs, a cooling labor market, the likely pick-up in economic activity in the coming months,” Barclays strategists including Andrea Kiguel wrote in a note to clients. “We think 2026 is likely to be a year of prolonged holds, though markets could try to add hike premiums if inflation momentum persists.”

Wall Street research veteran Ed Yardeni is recommending going underweight the Magnificent Seven megacap technology stocks versus the rest of the S&P 500, expecting a shift in earnings growth ahead.