• Asian stock markets are cautious as they await the Federal Reserve's interest rate cut decision.
• Central banks in Japan and the UK are expected to maintain their current policies amid geopolitical tensions.
• Economic data from China indicates a slowdown, suggesting the need for additional economic stimulus measures.
• The week ahead is crucial for global markets with policy decisions expected from central banks in the U.S., UK, and Japan.

As the week commences, Asian stock markets have adopted a cautious stance, with investors keenly awaiting the start of an easing cycle in the United States.

The primary point of contention lies in the magnitude of the Federal Reserve's interest rate cut, with the market divided over the possibility of a larger, half-point reduction. This scenario echoes previous easing cycles, where the size of the cut was a significant point of contention among market participants.

In addition to the U.S., central banks in Japan and the UK are also scheduled to meet this week. Both are expected to maintain their current policies, with the Bank of Japan potentially laying the groundwork for future tightening.

The geopolitical landscape continues to be a significant factor influencing global markets. A notable event was the reported second assassination attempt on Republican presidential candidate Donald Trump. The FBI confirmed the incident, adding another layer of complexity to the already tense political climate in the U.S.

Central Banks' Decisions and Market Reactions

Asian markets reacted to these developments with caution. MSCI's broadest index of Asia-Pacific shares outside Japan was nearly flat, following a 0.8% bounce last week. Market conditions were thin due to holidays in China, Japan, South Korea, and Indonesia.

Over the weekend, economic data from China indicated a slowdown in industrial output growth, which reached a five-month low in August. Additionally, retail sales and new home prices showed signs of weakening.

These indicators suggest that the Chinese government may need to implement additional economic stimulus measures by year-end, potentially through increased infrastructure spending, to meet its growth target of around 5%.

Market expectations for the Federal Reserve's interest rate cut have shifted significantly. The chance of a half-point cut has increased to 59%, up from 30% a week ago. This change in sentiment follows media reports that revived the prospect of more aggressive easing.

Historically, such shifts in market expectations have often preceded significant policy changes by the Federal Reserve.

Currency and Commodity Market Movements

The potential for a larger-than-expected rate cut by the Federal Reserve has led to a rally in bond markets, with two-year Treasury yields falling to their lowest close since September 2022. This is a common market reaction, as lower interest rates make bonds more attractive to investors.

The Bank of England is expected to leave rates on hold at 5.00% when it meets on Thursday, although markets have priced in a 31% chance of another cut. Similarly, the Bank of Japan is expected to hold steady at its meeting on Friday, but it may lay the groundwork for further tightening in October. These expectations are in line with the banks' historical behavior in similar economic conditions.

The drop in Treasury yields has boosted the yen against the dollar, which stood at 140.53 yen having slipped 0.9% last week to a near nine-month trough. The euro was steady at $1.1090, with the prospect of more rate cuts from the European Central Bank keeping a lid on the currency at $1.1200. The Canadian dollar held at 1.3580 per U.S. dollar after Bank of Canada Governor Tiff Macklem opened the door to faster rate cuts in an interview with the Financial Times.

Lower bond yields also underpinned gold, which stood at $2,582 an ounce and near an all-time peak of $2,585.99. Oil prices edged up as nearly a fifth of crude oil production in the Gulf of Mexico remained offline. Brent rose 19 cents to $71.78 a barrel, while U.S. crude firmed 28 cents to $68.93 per barrel.