By Selena Li
HONG KONG, Jan 25 (Reuters) - Asian shares and U.S. futures fell sharply on Tuesday, with investors nervous about the potential for military conflict in Ukraine and ahead of a key Federal Reserve meeting that could offer hints about the timing and pace of rate hikes.
Benchmarks slid, with most extending losses in afternoon trade. MSCI's broadest index of Asia-Pacific shares outside Japan shed 1.43% to its lowest in a month. The Nikkei closed down 1.66%, having earlier touched its lowest level since December 2020.
After a tumultuous session on Wall Street which saw a late rally and a higher close, U.S. share futures fell. Nasdaq futures were off 1.3% and S&P500 e-minis lost 0.95%%.
But in Europe, it looked like selling pressure would ease with pan-region Euro Stoxx 50 futures 1.16% higher and FTSE futures up 0.76%. That follows a 3.8% fall for the Euro STOXX 600 on Monday, its worst day in 18 months.
Tai Hui, Asia chief market strategist at J.P. Morgan Asset Management, said investors were facing a dilemma.
They are anxious about the outlook of monetary policy in the context of some growth stocks getting more expensive, while the growth outlook for 2022 is still decent and there are few assets that offer the same long-term return prospects like equities, he said.
"Geopolitical uncertainties in Europe this week and potential impact on energy prices further muddled the outlook," Hui added.
NATO said on Monday it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets, in what Russia denounced as Western "hysteria" in response to its build-up of troops on the Ukraine border.
Elsewhere in Asia, Korea's KOSPI dropped 2.34% while Hong Kong shares pared early losses but were still down 1.5%. The Australian benchmark tumbled 2.68% to close at an eight-month low, hurt also by a high inflation reading Tuesday morning that stoked fears of approaching rate hikes.
Keeping traders on their toes, the Federal Reserve will begin its two-day meeting later on Tuesday, with some investors starting to speculate about a surprise rate hike announcement though that is still seen as a small possibility.
"The big question mark is about the pace of the Fed hiking cycle - as the central bank seeks to tame the increase in inflation – and the impact on equity markets," Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management, said in a note to clients.
Fed tightening is putting pressure on some central banks in Asia to follow suit, potentially hurting their equity markets as happened in 2013 when the U.S. central bank began tapering its post financial crisis stimulus.
Singapore's central bank tightened monetary policy on Tuesday in an out-of-cycle move.
"The good news is that, by and large, current account balances in Asia are healthier compared to the taper tantrum in 2013," Bhayani added.
U.S. benchmark Treasuries were sitting out some of the rate hike speculation. Yields on benchmark 10 year notes slightly edged down slightly to 1.7618% having finished a choppy day of trading Monday near where they started.
In currency markets, the jitters sent the dollar higher against most peers. The dollar index was at 96.010, hovering near a two-week high, and the risk-friendly Aussie dollar gained briefly after the high inflation data.
China's yuan hovered at a more than 3-1/2-year high against the dollar, while its value against major trading partners jumped to strongest level since late 2015.
Oil prices were also elevated, further worrying stock investors. U.S. crude rose 0.4% to $83.63 per barrel and Brent crude was at $86.75, up 0.55%.
Gold held on to recent gains as investors sought safety. The spot price was at $1,842 an ounce, flat on the day but near last week's two-month high of $1,847.7.
(Reporting by Selena Li; Additional reporting by Alun John; Editing by Edwina Gibbs)