Asian shares consolidate gains after rally; Fed, BOJ awaited

HONG KONG (Reuters): Asian shares fell on Tuesday after a four-week rally ran out of steam as investors took cover ahead of central bank meetings in the United States and Japan later in the week, while disappointing US home sales weighed on the dollar.

European markets were set to open flat to lower, with earnings from major companies such as Deutsche Bank and Novartis in focus.

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.7%.

China’s main indexes slid more than 2% at one point, pressured by concerns about weak bank profits and growing bad loans, but pared losses by early afternoon.

Japan’s Nikkei eased 0.8%, though it remained near a two-month high.

Even as investors moved to the sidelines after a rally that has seen regional stocks rise more than 12% in a month, market strategists are becoming more optimistic over the outlook for equity markets in the near term.

“We have gone overweight on equities and our top pick in emerging markets is the Hong Kong-listed shares of Chinese companies because of the aggressive easing by China and likely more stimulus from Europe,” said Benjamin Pedley, head of investment strategy for Asia at HSBC’s private bank.

Risk sentiment has been supported by China’s rate cut last week – its sixth in less than a year – and the prospect of more easing from the European Central Bank in December.

There has been speculation the Bank of Japan might expand its asset buying campaign at a policy meeting on Friday, though recent reports make it less likely.

Dealers said there was no obvious news behind the Asian stock weakness on Tuesday, though some noted tensions in South China Sea as the US Navy sent a destroyer close to artificial islands built by China, drawing an angry rebuke from Beijing.

Still, some players were likely squaring positions ahead of the US Federal Reserve meeting on Tuesday and Wednesday.

Investors are pricing in no chance of a rate hike this week, but could react to how the Fed’s statement interprets recent soft US economic data and events in global financial markets.

Markets are currently pricing in only a modest chance of a tightening in December.

“We continue to believe that ongoing uncertainty - and also liquidity concerns at the year-end – will keep this extremely risk-averse Fed on hold until the March 2016 meeting,” says Michelle Girard, chief US economist at RBSM.

Commodity markets continued to be dogged by concerns over plentiful supplies and weak demand. Three-month copper was broadly flat at $5,206 a ton.

Crude oil stayed under pressure after two straight weeks of losses, on worries that the oversupply in oil products would swell from unseasonably warm weather and the waning maintenance cycle for US refineries.

US crude was down a percent at $43.45 a barrel, while Brent eased to $47.17 a barrel.