People walk past screens displaying the Hang Seng stock index and stock prices outside the Exchange Square in Hong Kong, China January 23, 2024. REUTERS/Joyce Zhou/File Photo

By Wayne Cole

SYDNEY, Dec 8 (Reuters) - Share and bond markets seemed guardedly optimistic on Monday that the Federal Reserve would deliver a much-needed rate cut this week, though the meeting looks set to be one of the most fractious in recent memory.

Futures imply around an 86% chance of a quarter-point reduction in the 3.75% to 4.0% funds rate, so a steady decision would be a seismic shock. A Reuters poll of 108 analysts found only 19 tipping no change, and the rest a cut.

"We expect at least two dissents in favour of no action and that only a slim majority of the 19 Fed participants will indicate in their updated dots that a December cut was appropriate," wrote Michael Feroli, head of U.S. economics at JPMorgan, in a note.

The Federal Open Market Committee has not had three or more dissents at a meeting since 2019, and that has happened just nine times since 1990.

Feroli also thinks the Fed will cut in January as insurance against a sustained weakening in the labour market, before going on a lengthy policy pause. Markets currently see only a 24% chance of a January move and a further easing is not fully priced until July.

Central banks in Canada, Switzerland and Australia also meet this week and all are poised to hold steady. The Swiss National Bank might like to ease again to offset the strength of its franc, but is already at 0% and reluctant to go negative.

A run of hot economic data has led markets to abandon any hope of another easing from the Reserve Bank of Australia and even price in a rate hike for late 2026.

Hopes for more Fed stimulus have helped support equities in recent weeks, and both S&P 500 futures and Nasdaq futures were 0.2% firmer in Asian trade.

Earnings this week from Oracle and Broadcom will test the appetite for all things AI-related, while Costco will provide colour on consumer demand.

BONDS HAVE A LOT RIDING ON FED GUIDANCE

In Asia, Japan's Nikkei went flat, after making a modest 0.5% gain last week. South Korean stocks added 0.8%, having jumped 4.4% last week on confirmation of a lower U.S. tariff on its exports.

MSCI's broadest index of Asia-Pacific shares outside Japan firmed 0.1%.

Chinese blue chips gained 1.0% as data showed the country's exports rose 5.9% in November, topping forecasts of 3.8% and staying resilient in the face of U.S. tariffs. Imports missed modestly with a rise of 1.9%, suggesting domestic demand remained subdued overall.

Beijing's diplomatic spat with Tokyo worsened as a Chinese carrier strike group launched intense air operations near Japan over the weekend. Elsewhere in the region, Thailand launched air strikes along its disputed border with Cambodia.

In Europe, EUROSTOXX 50 futures and FTSE futures edged down 0.1%, while DAX futures were little changed.

In bond markets, longer-dated Treasuries have been under pressure given the risk of hawkish guidance from the Fed, even if it does agree on a cut this week.

There are also concerns President Donald Trump's attacks on Fed independence could lead to rates going too low and stoking inflation over the long run.

On Monday, 10-year yields were steady at 4.142%, having climbed 9 basis points last week.

The rise in yields had helped the dollar steady after two weeks of decline, though its index was now off 0.1% at 98.876.

It slipped 0.2% on the yen to 154.99, with markets increasingly confident the Bank of Japan will raise its rates at a policy meeting next week.

The euro was a shade firmer at $1.1654, just short of its recent seven-week high of $1.1682.

Commodities have been generally underpinned by wagers on more U.S. policy stimulus, with copper reaching all-time highs thanks to a mixture of supply concerns and demand from AI-related infrastructure investment. [MET/L]

Gold stood at $4,210 an ounce, after spiking as high as $4,259 on Friday, while silver was just off a lifetime peak. [GOL/]

Oil prices were also supported by the chance of lower interest rates, combined with geopolitical uncertainty that could limit supplies from Russia and Venezuela. [O/R]

Brent added 0.1% to $63.84 a barrel, while U.S. crude rose 0.2% to $60.17 per barrel.

(Reporting by Wayne Cole; Editing by Saad Sayeed and Muralikumar Anantharaman)