by Diana Mandia

PARIS (Reuters) – Major European stock markets are expected to open cautiously higher on Monday, buoyed by the prospect of a rate cut by the U.S. Federal Reserve this week, although markets are divided over the extent of the reduction.

According to the first available indications, the Parisian CAC 40 should open without major changes.

Futures contracts indicate a rise of 0.04% for the Dax in Frankfurt, 0.05% for the FTSE in London and 0.08% for the EuroStoxx 50.

The U.S. central bank’s meeting scheduled for Tuesday and Wednesday is expected to conclude with a long-awaited cut in borrowing costs, although investors remain divided over its size: a 25 basis point cut is still seen as the most likely outcome but bets on more aggressive easing have strengthened since last week.

“We agree that the decision will likely be tight, but we also think the Fed will make the ‘right’ decision and go for 50 basis points,” said Michael Feroli, an analyst at JPMorgan.

Hopes for a 50 basis point cut have been raised after a series of mixed data on the U.S. labor market, as the Federal Reserve tries to bring inflation back toward its target without dealing a severe blow to the economy.

Easing cycles, however, tend to start with quarter-point cuts, and several Fed officials ahead of this meeting used words like “gradual” and “methodical” to describe the likely pace.

Monetary policy will also be in focus in the UK and Japan this week, with their central banks meeting on Thursday and Friday respectively.

In China, industrial output growth slowed to its weakest pace in five months in August, while retail sales and new home prices continued to decline, which analysts said strengthened the case for further economic stimulus in the world’s second-largest economy by year-end.

A WALL STREET

The New York Stock Exchange ended higher on Friday, as investors bet on a sharper-than-expected cut in the Federal Reserve’s key interest rate next week.

The Dow Jones index gained 0.72%, the broader Standard & Poor’s 500 gained 0.54% and the Nasdaq Composite advanced 0.65%.

IN ASIA

The Tokyo Stock Exchange is closed on Monday for Respect for the Elderly Day.

In mainland China, markets are also closed Monday and Tuesday for the Mid-Autumn Festival and will reopen on Wednesday.

The Hong Kong stock market fell by 0.04% after the publication of disappointing economic data on the Chinese economy.

RATE

U.S. Treasury yields edged higher on Monday after Friday’s sharp easing in bond markets, with caution ahead of the Fed’s interest rate decision.

The yield on 10-year Treasuries rose 0.8 basis points to 3.6570%, while the two-year gained 1.1 basis points to 3.5866%.

In foreign exchange markets, the dollar is falling in anticipation of the monetary easing cycle in the United States, with investors pricing in the possibility of a more aggressive move than previously expected.

The greenback lost 0.24% against a basket of benchmark currencies, while the euro gained 0.18% to $1.1096.

OIL

Oil prices edge higher on expectations of a U.S. interest rate cut, although gains are limited by weaker-than-expected Chinese data and lingering demand concerns.

Brent gained 0.01% to $71.62 per barrel and US light crude (West Texas Intermediate, WTI) gained 0.17% to $68.77.

(Written by Diana Mandiá)

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