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Asian share markets were mostly lower Tuesday, with a surprise decision to hike interest rates in Australia weighing slightly on that market, while many investors were cautious ahead of a widely-anticipated U.S. Federal Reserve meeting this week.

The Reserve Bank of Australia's decision to hike its cash rate by 25 basis points to 4.75% also triggered a rally in the Australian dollar and other risk-sensitive currencies such as the euro.

Japan's Nikkei Share Average was down 0.1%, Australia's S&P/ASX 200 fell 0.1%, South Korea's Kospi Composite was 0.1% lower, China's Shanghai Composite Index was 0.3% higher, Hong Kong's Hang Seng Index was flat and India's Sensex was flat.

Dow Jones Industrial Average futures were unchanged in screen trade.

Investors were generally reluctant to buy into stocks ahead of the Federal Reserve's policy meeting on Tuesday and Wednesday. It is widely expected to unveil a second round of quantitative easing steps to recharge an anemic U.S. economy. However, question marks remained on the size and scope of fresh stimulus from the Fed.

"It's all about QE2," said Nick Burmester, an institutional trader at MF Global in Sydney. "Everyone's getting bearish on the size of it, but market's are still priced for close to $1 trillion. We can't see a lot of upside in a big number, because it's in the price." Markets were also keeping a watch on U.S. midterm elections Tuesday, which is expected to see some large gains by Republicans in the U.S. House of Representatives.

Most markets--especially the currency markets--were galvanized into action after the RBA's unexpected hike. The Sydney market dipped slightly in the minutes following the hike, but has since attracted buying amid in a surge in the Australian dollar. "The RBA hit the market with a big surprise," said Jun Kato, senior dealer at Shinkin Asset Management in Tokyo. "Most investors had believed the central bank won't raise rates at least until December as recent (inflation) data were weak. The Australian dollar should remain strong for the time being as today's move suggests the RBA may hike rates again very soon," he said.

Material and financial plays were lower after outperforming on Monday. Trading was relatively subdued due to Tuesday's Melbourne Cup race.

Rio Tinto lost 0.3% and Newcrest Mining gave up 1.2%. Major banks were down 0.3% to 0.9%, with Macquarie off 0.9%.

BHP Billiton was 0.2% higher after Canada's National Post reported that Canada's industry department has given a cautious go-ahead for BHP's US$39 billion bid for Potash Corp., albeit with strings attached.

Westfield tacked on 2.2% on recent reports of potential asset sales. Investors were also buying after the multinational shopping center group last week opened its new flagship in Sydney, with 130 fashion and food specialty stores.

In Tokyo, the market was struggling for traction as investors were cautious ahead of the Fed and U.S. election outcomes.

"The key issue is whether the weak dollar trend will reverse" after the Fed meeting, said Kenichi Hirano, operating officer at Tachibana Securities.

Honda Motor was off 2.1% and extended Monday's losses after cutting its second half net profit outlook due to the strong yen. Mazda Motor fell 2.5% after it reported a decline in October domestic sales.

Elpida Memory lost 5.7% on a disappointing second-quarter net profit forecast while Astellas Pharma fell 1.3% after its reported poor first half results on Monday and also lowered its full-year earnings outlook.

In Hong Kong, retail plays were higher after data showed the retail sales volume for September was up 15.8% on-year, supported by tourist spending and improved labor market conditions.

Sa Sa International gained 1.2% and Giordano was 0.4% higher.

The South Korean market was trading lower as investors took to the sidelines ahead of the Fed decision.

"The market's consensus on the size of the Fed's measures has been lowered, to around $500 billion. The market will cheer if the result comes in above that expectation, but if it is below that, some shocks (for stocks) are expected," said Daishin Securities' Park Jung-seop.

Tech stocks were lower as recent earnings reports raised concerns about their near-term outlook amid soft global consumer demand.

Samsung Electronics lost 0.9% and LG Electronics fell 0.2%. Shipbuilders and chemical firms were up on their upbeat business outlooks, with Hyundai Heavy up 1.2%, Daewoo Shipbuilding 2.7% higher and LG Chem up 1.2%.

Elsewhere in the region, Taiwan's Taiex was off 0.2%, Singapore's Straits Times Index gained 0.5%, Malaysia's Kuala Lumpur Composite Index was 0.2% lower, Philippine shares rose 1.7%, Indonesia shares were 0.4% lower, shares in Thailand were up 0.2% and New Zealand's NZX-50 was up 0.8%.

In foreign exchange markets, the Australian dollar and the euro rose after the RBA's surprise, which marked the first hike in six months after the central bank had raised rates by 150 basis points since late 2009 until May of this year.

"The decision obviously took the market by surprise especially following last week's slightly softer (Australian) inflation data," said Credit Agricole Corporate and Investment Bank in a note to clients.

"High terms of trade and modest spare capacity will contribute to the need for further tightening further down the line and we look for further hikes, with at least another" 25 basis point move in the first quarter of 2011, the note said.

The Australian dollar rose to US$0.9977 from US$0.9888 prior to the RBA move.

The euro was fetching $1.3920, from $1.3885 late Monday in New York, and was at Y112.06 against the yen, from Y111.91. The dollar was at Y80.49, from Y80.60.

Lead Japanese government bond futures were down 0.15 at 142.93 points, while the 10-year cash JGB yield was up one basis point at 0.955%.

Spot gold was at $1355.40 per troy ounce, up $4.10 from its New York close Monday. December Nymex crude oil futures were up 40 cents at $83.35 per barrel on Globex.
http://online.wsj.com/article/BT-CO-20101102-700172.html