GLOBAL MARKETS-Stocks stymied pending Fed and yen decisions

With the central bank widely expected to hold rates steady, investors will scrutinise Fed Chair Jerome Powell's speech to gauge where interest rates are headed and how long they will stay higher. "The Federal Reserve is in a desirable position as it prepares to announce policy this evening thanks to the combined effect of rate hikes and higher Treasury yields keeping pressure on prices," said Francesco Pesole, strategist at ING.

Stocks stagnated while bond yields edged higher on Wednesday as markets awaited a key policy decision from the U.S. Federal Reserve, as well as any signs of Japanese authorities intervening to prop up the battered yen.

Europe's benchmark STOXX index was up just 0.04%, as was MSCI's broadest index of Asia-Pacific shares outside Japan , while U.S. futures slipped 0.4%. Japan's Nikkei was 2% higher as investors remained on red alert for yen-buying intervention from authorities to try to scrape the currency off the floor after central bank policy tweaks failed to reverse its recent losses.

The spotlight on Wednesday, meanwhile, will firmly be on the Federal Reserve's policy decision. With the central bank widely expected to hold rates steady, investors will scrutinise Fed Chair Jerome Powell's speech to gauge where interest rates are headed and how long they will stay higher.

"The Federal Reserve is in a desirable position as it prepares to announce policy this evening thanks to the combined effect of rate hikes and higher Treasury yields keeping pressure on prices," said Francesco Pesole, strategist at ING. Powell is likely to tread carefully in trying to mitigate any inference that further rate hikes are completely off the table, despite the tightening in financial conditions, Pesole said.

Markets are pricing in a 29% chance of a 25 basis point (bp) hike in December and a 35% chance of a 25 bps hike in January, the CME FedWatch tool showed. S&P e-mini futures fell 0.43%, while NASDAQ futures were down 0.47% and DOW futures sank 0.33%.

Treasury yields remained elevated, with the yield on 10-year Treasury notes up 3 bps to 4.9011%. The yield on the 30-year Treasury bond was up 4 bps to 5.0634%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down slightly at 5.0665%.

Claudio Irigoyen, global head of economics at BofA Global Research, said the most important question for the next three to five years in the discussion about U.S. fiscal policy was whether interest rates would go back to pre-pandemic levels. "Or if this is a new regime of higher real interest rates," Irigoyen said. "And I think that I am more on the camp of the second option."

YEN VIGIL The yen recovered somewhat on Wednesday after a hammering the day before when the Bank of Japan (BOJ) tweaked its bond yield control policy, loosening its grip on long-term rates and shunting the currency to a one-year low against the dollar.

That prompted a fresh and sterner warning from Japan's top currency diplomat Masato Kanda on Wednesday that authorities stood ready to respond to recent "one-sided, sharp" moves in the currency, helping it recover 0.35% against the dollar to 151.2. "The market has seen the tweak to a flexible regime as clear dovish development," said Chris Weston, head of research at Pepperstone.

"Once again market players have been left frustrated by the lack of urgency shown by the BOJ, and either closed yen longs or flipped into outright yen shorts." The yen remained close, however, to one-year lows of 151.74 it hit on Tuesday and the three-decade low of 151.94 touched last year, which triggered an intervention by Tokyo at the time.

Against a basket of currencies, the dollar was up 0.21% at 106.9. Sterling was last at $1.2125, down 0.23% on the day. Data on Wednesday showed Asia's manufacturers faced worsening pressure in October with factory activity in China slipping back into decline, clouding recovery prospects for the region's major exporters already squeezed by weaker global demand and higher prices.

Oil prices rose ahead of the Fed decision, with the market keeping a close eye on the latest developments in the Israel-Hamas conflict, as geopolitical risks offset record production levels in the U.S. U.S. crude rose 2% to $82.62 per barrel and Brent was at $86.59, up 1.85% on the day.