Global Markets: Asia braces for Fed as plunge in oil boosts bonds

By Wayne Cole

SYDNEY (Reuters) - Asian share markets played second fiddle to bonds on Wednesday as a spectacular fall in the price of oil fanned speculation the U.S. Federal Reserve might be done with tightening after its policy meeting later in the day.

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> gained 0.2 percent in hesitant early trade. Japan's Nikkei <.N225> eased 0.1 percent, while E-Mini futures for the S&P 500 inched up 0.17 percent.

Oil stole the show as a glut of supply saw U.S. crude sink 8 percent overnight, while Brent shed almost 6 percent. U.S. crude was last changing hands at $46.30 a barrel having hit its lowest since August 2017. [O/R]

Brent's 35 percent plunge since October is sending a disinflationary pulse through the world at a time when trade and economic activity are already cooling.

That has only added to pressure on the Fed to abandon its commitment to yet more hikes.

U.S. President Donald Trump on Tuesday warned the central bank not to "make yet another mistake", while the Wall Street Journal wrote an editorial calling for a pause.

So far, the futures market <0#FF:> is sticking with a two-in-three chance of a rate increase on Wednesday.

"Despite recent market volatility we think that it is still more likely than not that the Fed will raise rates," said ANZ senior economist Tom Kenny.

"But we lean slightly towards the Fed removing the reference to the need for "further gradual increases"."

He also expects the median Fed forecast, or dot plots, to drop to two rate rises next year, from the three projected back in September. The market is well ahead of that and pricing in less than one rise in 2019.

Talk of a dovish turn helped Wall Street steady and the Dow <.DJI> ended Tuesday up 0.35 percent. The S&P 500 <.SPX> edged up 0.01 percent and the Nasdaq <.IXIC> 0.45 percent.

BOND BONANZA

Stocks were left in the dust by bonds as 10-year Treasury yields hit their lowest since August at 2.8190 percent , near a major chart level at 2.80 percent.

Yields on two-year U.S. notes fell 4 basis points to a three-month trough of 2.656 percent, a massive turnaround from November's 2.977 percent peak.

Japanese 10-year bond futures likewise started Wednesday at their highest since August 2016.

Reasons for the rally were easy to find. The latest survey of fund managers globally from BofA Merrill Lynch showed the third biggest decline in inflation expectations on record, while just over half expected the world economy to slow next year.

Investors rushed into bonds, with the largest ever one-month rotation into fixed-income assets, while cutting equities.

"Investors are close to extreme bearishness," said Michael Hartnett, chief investment strategist at BofAML. "All eyes are on the Fed, and a dovish message could equal a bear market bounce."

The steep drop in Treasury yields undermined one of the U.S. dollar's major props and pulled its index back to 97.000 <.DXY>, from a recent 97.711 top.

It fell to 112.46 yen , from a 113.70 high last week, while the euro nudged up to $1.1374 from a $1.1266 low.

In commodity markets, gold held near its recent five-month peak as the dollar eased and the threat of higher interest rates waned. Spot gold stood at $1,248.85 per ounce.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)

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