Asian stocks tread water at the start of US Fed week

Asian stocks started the week on a cautious note as traders navigate deteriorating China-Japan relations, a heavy slate of central bank decisions and the broader outlook for risk assets heading into next year.

MSCI Inc.’s gauge of Asian equities fell 0.1%, in line with the decline in US stock index futures. Shares in Australia also dropped, while the Nikkei 225 lost 0.4%. Japan’s economy shrank in the three months through September, the government confirmed in a revised report, while the nation’s relations with China cooled further.

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. Markets were also bracing for policy announcements from central banks spanning Australia to Brazil and the US, just as renewed inflation pressures prompt a reassessment of next year’s monetary outlook.

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While the Federal Reserve is still likely to cut interest rates on Wednesday, “the rate path for 2026 is more uncertain as members balance lingering price pressures from tariffs, a cooling labour market, and the likely pick-up in economic activity in the coming months,” Barclays strategists, including Andrea Kiguel, wrote in a note to clients.

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

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.