Political developments in Japan and France eyed

Asia-Pacific Stock markets delivered mixed performance overnight, with Japan’s Nikkei 225 pencilling in an all-time high of 44,185 before surrendering gains to close marginally in the red. For any technical analysts reading, this has presented what is referred to as a ‘Dark Cloud Cover’ bearish pattern on the daily chart.

The Nikkei gapped approximately 2.0% at the open on Monday following PM Shigeru Ishiba's weekend resignation announcement. The succession race has centred around two prominent candidates: Sanae Takaichi, who would make history as Japan's first female PM, and Shinjiro Koizumi, heir to the political legacy of former PM Junichiro Koizumi. The JPY initially experienced a knee-jerk move lower due to political uncertainty, providing additional support for the export-heavy Index. In the US, Stock markets also reached record highs early in the week, with the technology sector taking the lead – the Nasdaq Composite closed at a new record high in the previous session.

Meanwhile, in the FX space, the USD finished Monday on the back foot and is fast approaching YTD lows as measured by the USD Index. This follows Friday’s disappointing US August jobs report, which all but cemented a rate cut next week from the Fed. As you would expect, the EUR closed yesterday higher, with the shared currency moderately advancing in early Europe this morning. European markets are also contending with political instability as PM François Bayrou resigned following a defeat in a confidence vote. This would mark France’s fifth PM in less than two years, reflecting a country with a fragmented political landscape.

US Treasury yields bull flattened on Monday, with the benchmark US 10-year Treasury yield trading at 4.053%. Japan's 10-year yield declined about one bp to 1.555%, and UK 10-year yields were down four basis points to 4.610%.

Spot Gold continued to tear higher on Monday, rising 1.4% to clock fresh record highs of US$3,635. In addition, Oil prices are recovering modestly, with WTI up 0.8% to US$62.45. The Oil gains follow confirmation from OPEC that October's production increase will be limited to 137,000 barrels per day, which is smaller than initially signalled.

With limited economic data on the docket today, market participants will be focussed on Wednesday's PPI inflation numbers and Thursday's widely anticipated US CPI inflation data, ahead of the Fed's policy meeting. Investors are now fully pricing in a 25 bp Fed rate cut (-27 bps). Interestingly, investors are also expecting nearly three rate cuts this year (-70 bps), which would include a rate cut next week, another in October, and possibly again in December. However, should inflation data show a notable increase, this may help shape expectations for the pace of subsequent policy easing.

Key levels to watch:

• USD Index: Daily support has been breached at 97.72; monitor for a retest and follow-through selling.
• Nikkei 225: Possible consolidation to form after hitting intraday records.
• Gold: Testing fresh all-time highs above $3,650; assess for pullbacks.