Morning Bid: Nikkei retreats, China rallies

A look at the day ahead in European and global markets from Wayne Cole.

There's so much news it's hard to know where to start, what with strife in the Middle East and more stimulus measures out of Beijing. The Nikkei stole the early show with a drop of 4.6% as markets price in the risk of higher interest rates under new Prime Minister Shigeru Ishiba.

He has long been a critic of the Bank of Japan's uber-easy policies so investors assume he will not stand in the way of policy normalisation. Still, actually being in charge can change attitudes and he sounded a lot more conciliatory over the weekend, saying easy policy was needed given the state of the economy.

Markets still show almost no chance of a BOJ tightening in October, but have 6 bp of hikes for December, so about a 24% chance of a quarter-point rise. Then again, the market only has the current 0.25% rate reaching 0.5% by the end of next year, so it's not exactly a hawkish outlook.

Ishiba's comments were enough to help the dollar steady at 142.64 yen, after Friday's 1.8% drop as low as 142.07. The euro is a shade firmer at $1.1170, having got a lift last week from the benign U.S. core PCE price index.

The U.S. data left markets pricing in a 52% chance of another outsized rate cut from the Federal Reserve on Nov. 7, though obviously the presidential election is a wild card for that.

A victory for Donald Trump would be seen as a risk for higher inflation and a stronger dollar, given his stated preference for wide-scale tariffs. PredictIt shows Kamala Harris ahead at 57 cents to 48 cents but that is hardly a convincing lead.

A host of Fed officials will have a chance to speak their minds this week, led by Chair Jerome Powell later on Monday, while Friday's August payrolls report looms large in deciding how big the next cut will be.

While the Nikkei stumbled, Chinese stocks extended their meteoric run with a rise of 5% after the country's central bank said it would guide mortgage rates lower.

The property sector got an added boost after first-tier cities such as Guangzhou lifted all home purchase restrictions over the weekend, while Shanghai and Shenzhen announced plans to ease curbs on buying.

The rush of stimulus helped to offset a drop in the Caixin/S&P Global manufacturing PMI to 49.3 in September, and a slowdown in the services PMI to 50.3

Key developments that could influence markets on Monday:

- German CPI and retail sales, French CPI. EU consumer and business sentiment

- Introductory statement by ECB President Christine Lagarde at ECON Hearing. Bank of England policymaker Megan Greene takes part in a panel discussion



- Federal Reserve Chair Jerome Powell speaks on the economic outlook. Fed Board Governor Michelle Bowman speaks

- US Chicago PMI, Dallas Fed activity index

Source: Investing.com