Japan's Nikkei Plummets Over 2,000 Points Amid Change Of Guard, While Chinese Market Extends Stimulus-Driven Run: What's Driving Sentiment In Asia

The major Asian markets diverged on Monday as country-specific catalysts drove the averages to either side of the unchanged line. Amid the development, the U.S. index futures remained unchanged, with a slight positive bias.

Geopolitics Weighs On Japan: Japan’s key stock market gauge, the Nikkei 225 average, gap-opened lower and fell sharply in early trading. Since then it has been moving roughly sideways around depressed levels. At last check, the export-heavy index was down about 2,000 points or 5.02% at 37,836.70.

The negative reaction comes as 67-year-old Shigeru Ishiba assumes the reins as the country’s prime minister after he was elected to lead the Liberal Democratic Party. He is widely expected to be sworn in as the prime minister on Tuesday, given the LDF is the majority party in the Japanese parliament Diet.

Japanese public broadcaster NHK said traders could be unwinding positions as they step to the sidelines to see off the policy announcements by Ishiba.

The yen has been modestly stronger against most major currencies early Monday in Asian hours.

Ishiba is a proponent of normalizing monetary policy, which would mean more rate hikes, and favors a more restrictive fiscal policy, including increasing taxes on corporations and financial income, Nikkei reported. He also supports raising minimum wages in a bid to boost consumer sentiment and end deflation, the report said.

“Market caution seems to have spread for such issues, as Mr. Ishiba’s indicated [his] intention to tax financial income and [create] leeway for raising corporate tax,” said Nozomi Moriya, Japan equity strategist at UBS Securities, according to the report.

A separate Nikkei report, citing senior party officials that Ishiba plans to call for snap polls on Oct. 27. The former defense minister reportedly plans to dissolve the House of Representatives in October to seek a public mandate even as he has been actively selecting new executives of the ruling party and members of his prospective government.

See Also: How To Buy Japanese Stocks

China Rides High On Stimulus Largesse: China as well as Hong Kong continued to rally hard on Monday. At last check, the Shanghai Composite Index soared 7.49% to 3,318.64 and the Hang Seng Index climbed 3.87% to 21,431.14.

The buoyancy is seen as a result of China’s intent to reinvigorate economic growth through stimulus measures. The People's Bank of China announced last week it will in the near future cut the reserve requirement ratio, which is the amount of cash banks must hold as reserves, by 50 basis points freeing up about 1 trillion yuan ($142 billion) for new lending, Reuters reported.

The central bank hinted at the possibility of reducing it by an incremental 0.25-0.50% points. The PBoC also said it would lower the seven-day repo rate by 0.2 points, the interest rate on a medium-term lending facility by about 30 basis points and loan prime rates by 20-25 basis points.

Since Sept. 23, the Shanghai Composite Index has soared over 20%.

Monday’s rally in Chinese stocks was facilitated by strengthening evidence of economic weakness. The Caixin China manufacturing purchasing managers’ index fell from 50.4 in August to 49.3 in September, according to a report released by S&P Global. A reading below 50 suggests contraction. The service sector PMI also dipped from 51.6 to 50.3, showing a slowdown in the pace of service sector expansion.

Weak data would allow leeway for authorities to lavish more stimuli into the economy.

The iShares MSCI Japan ETF EWJ ended Friday’s session down 2.62% at $71.08, according to Benzinga Pro data, while the iShares MSCI China ETF MCHI gained 1.78% before closing at $50.99. For the year, these ETFs are up 11.64% and 1.48%, respectively.

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