Asian Markets Retreat as Investors Recalibrate Federal Reserve Outlook

The MSCI Asia-Pacific index outside Japan declined 0.5%, mirroring a 0.2% slip in S&P 500 e-mini futures. In Japan, the Nikkei 225 retreated 0.6%, despite positive manufacturing data showing new orders reaching their highest level in over four years. South Korean shares faced significant pressure with a 2% decline, while Taiwan’s market bucked the trend to reach a fresh high.

Chris Weston, head of research at Pepperstone Group Ltd, noted that market leadership is shifting away from tech-heavy assets. Investors are rotating toward defensive sectors that promise more predictable cash flows. This comes as traders calculate a 54% probability of at least two 25-basis-point interest rate hikes by year-end, a sharp increase from the 15.2% chance estimated just one week ago.

Currency markets remain sensitive, with the yen hovering near 161.55 against the dollar—a level not seen in four decades. Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent held emergency talks late Monday to address the volatility. Meanwhile, the British pound stabilized at $1.3247 following Prime Minister Keir Starmer’s announcement that he will resign, initiating a transition of power expected to favor Andy Burnham.