Japan’s Nikkei index slides after Ichiba wins leadership election, China stocks continue rally

Global stocks pulled back from record highs on Monday as unrest in the Middle East sparked economic uncertainty, while Chinese shares surged, posting their largest single-day gain in 16 years following Beijing's latest stimulus measures.

Ongoing Israeli strikes in Lebanon added to geopolitical concerns, though oil prices remained subdued by the risk of potential increases in supply. U.S. stock futures dipped 0.3%, and shares in the Euro STOXX 600 dropped nearly 1%, weighed down by profit warnings and bleak outlooks in the automotive sector.

Japan’s benchmark Nikkei index tumbled close to 5% after Shigeru Ishiba, seen as a monetary policy hawk, won the leadership contest to become Japan's prime minister. This led to MSCI’s world stock index slipping 0.3%, retreating from a record high set last week. The Nikkei index is up 13.31% year-to-date despite the recent slide.

China was the standout, with recently unveiled aggressive government stimulus continuing to drive stocks higher after a blockbuster week saw major benchmarks, such as Hong Kong's Hang Seng index, post their best results in close to three decades. The CSI300 index jumped 8.5%, marking its biggest daily gain since 2008, adding to a 25% surge over the past five trading days. The Shanghai Composite also climbed 7.1%, building on last week’s 13% rally. The Hang Seng index rose by a more modest 2.4%, adding to last week's gains of 13%.

Matt Tickle, chief investment officer at consultancy Barnett Waddingham, commented on the dynamics to Reuters, offering a dose of caution amid the frenzy:

“The Chinese stimulus has created some noise, but the market may be front-running these first few steps, which might lead to disappointment later if measures don't continue”.

Tickle also urged caution regarding long-term trends, stating he'd feel reassured only once there's clarity on upcoming actions from not just China's central bank, but from policymakers worldwide. "It's central bank watch, yet again," Tickle said.

The week ahead will see a swathe of U.S. economic data releases — including a nonfarm payrolls report that could influence whether the Federal Reserve delivers another outsized 50-basis-point interest rate cut in November.

Wall Street on a roll, US core CPI reading raises bets of another 50bps cut by the Fed

China’s rally contributed to MSCI’s broad Asia-Pacific index outside Japan firming 0.1%, building on last week's 6% surge to reach a seven-month high.  

Wall Street also had a robust week, aided by a benign core U.S. inflation reading on Friday, keeping the door open for another half-point rate cut by the Fed. Current futures indicate around a 55% probability of a 50-basis point rate cut on November 7, although the U.S. presidential election two days earlier introduces considerable uncertainty into the mix.

Several Fed officials are scheduled to speak this week, with Chair Jerome Powell leading on Monday.

Yen slides, euro edges up, gold on course for best quarter since 2016

In currency markets, the dollar strengthened 0.2% to 142.49 yen after a 1.8% slide on Friday from a peak of 146.49. The dollar index dipped 0.2% to 100.28, following a 0.3% decline last week.  

The euro edged up to $1.12, buoyed by Friday’s positive U.S. inflation data, but shed the gains later in the session. The eurozone will release inflation figures this week, along with producer prices and unemployment data. German inflation and retail sales are expected later on Monday, while ECB President Christine Lagarde will address the European Parliament.

Brent crude oil futures declined by 52 cents to $71.46, and West Texas Intermediate slipped 28 cents to $67.90. While storm Helene has largely passed, leaving widespread damage across the southern United States, a new tropical depression is expected to intensify into a significant hurricane later this week. Hurricanes that impact the U.S. South and Eastern seaboard disrupt the supply chain of oil products and fuel supply concerns from the world's largest oil producer.

Meanwhile, a softer dollar and lower bond yields helped gold prices climb to $2,685 per ounce. It recently stood at $2,637, on course for its best quarter since 2016.

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