'Fed week' first trading day: Asian, European stocks start higher

0.25% drop seen as certain, focus on dot plot forecasts and Powell's outlook

Options market expects up to 0.72% intraday swings on rate announcement day

With expectations mounting that the Federal Reserve will cut its policy rate this week, global markets traded near record highs on the 15th (local time).

On that day South Korea's KOSPI rose 0.35% to a new record, as semiconductor stocks continued their rally on hopes for AI demand and the government said it would keep the major shareholder threshold for capital gains tax as before. Hong Kong stocks gained, with the Hang Seng Index up 0.22% as tech shares were bought on hopes for a U.S.-China trade deal.

By contrast, mainland Chinese markets fell 0.26% after August industrial production data came in weaker than expected, and Taiwan's Taiex index dropped 0.46%. Japan's markets were closed for a holiday.

European markets broadly gained, with the pan-European STOXX 600 index up 0.3%. After last weekend's downgrade of France's credit rating by Fitch, French stocks opened lower for a second trading day but then turned higher.

U.S. S&P 500 futures and Nasdaq index futures moved roughly in line with last Friday's close. Dow Jones Industrial Average futures were up 0.2%.

The 10-year U.S. Treasury yield fell to 4.059%, down by less than one basis point (1bp=0.01%), while the 2-year note yield moved around 3.551%, similar to the previous trading day.

With the Fed very likely to cut the federal funds rate to 4.0~4.25% on the 17th, U.S. President Trump pressed the Fed, saying he expects a "big cut (0.5%)". However, rate futures put the probability of a 50-basis-point cut at about 4%.

With a rate cut considered certain, attention at this meeting will focus on Fed officials' 'dot plot' projections for rates and the guidance on the pace and scope of further easing provided by Fed Chair Jerome Powell.

Because rate futures have already priced in 125bp of cuts through the end of next year, a different outlook could disappoint markets.

David Mericle, chief U.S. economist at Goldman Sachs, said, "The key question for the September FOMC meeting is whether the Fed signals this is the first of a series of rate cuts." He added, "Chair Powell will mention weakness in the labor market in the statement, but I do not expect a change in policy direction or a mention of consecutive cuts in October."

According to Citigroup, the options market expects the U.S. nonfarm payrolls report due on Oct. 3 to move the market up or down by 0.78%, and expects the Fed's rate decision on the 17th to move the market up or down by 0.72%.

Both the Bank of Japan and the Bank of England are expected to keep rates unchanged this week.

The euro strengthened on a steady outlook for EU rates. The European Central Bank said last week that policy was in a "good place."

The dollar fell 0.2% against the yen to 147.42.

Gold traded at $3,642 an ounce, just below last week's record high of $3,673.95 an ounce.

Brent crude rose 0.5% to $67.33 a barrel.

That day U.S.-China trade talks entered their second day in Madrid. President Trump said negotiations were still ongoing over the deadline for the sale of China's TikTok app.

Guest reporter Jeong-A Kim kja@hankyung.com