Stock markets diverge before Fed as China woes weigh

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European and Asian stock markets diverged Monday as investors awaited the US Federal Reserve's first interest-rate cut since 2020, while worries over the Chinese economy dragged down sentiment.

The yen strengthened to less than 140 to the dollar for the first time since mid-2023 ahead of the Fed's decision on Wednesday -- and a policy meeting at the Bank of Japan (BoJ) two days later.

Expectations that the Fed could cut as much as 50 basis points with inflation cooling weighed on the dollar, which in turn helped haven investment gold to a new record high.

This week also sees rate decisions from the Bank of England and Norwegian central bank.

"Markets are in 'wait and see' mood amid high anticipation of the crunch interest rate decision from the Federal Reserve this week," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

"Investors remain split about the size of the Fed rate cut, which the policymakers are expected to deliver. More bets are being put on the likelihood that there may be 50 basis-points reduction announced."

Although expectations of a 50-basis-point cut have risen, some analysts warned that it could send a signal that decision-makers are worried about the health of the world's largest economy.

All three main indexes on Wall Street pushed higher Friday, with the Dow and S&P 500 within a whisker of their record highs.

London's FTSE 100 index dipped Monday ahead of the Bank of England's latest decision on borrowing costs due Thursday, one day after the Fed outcome.

The BoE is expected to keep its key rate unchanged after cutting in August, while the European Central Bank further reduced borrowing costs last week as inflation cools.

Asian stock markets fluctuated on Monday, with Hong Kong edging up but Singapore slipping.

Trade was muted with holidays in Tokyo and Shanghai.

On currency markets the yen briefly hit 140.07 per dollar -- its strongest level since July last year -- while gold struck a fresh record high of $2,589.70 per ounce.

Traders are keeping tabs on developments in China after more weak data on credit, retail sales, industrial production and house prices stoked concerns about the state of the world's number two economy.

The figures "collectively add to concerns that policy measures announced in recent weeks and months have so far failed to have any measurable impact in lifting economic growth", said National Australia Bank's Ray Attrill.

He added that investors will be keenly watching the Chinese government's upcoming Politburo meeting -- the date of which has yet to be set.

The Fed's decision is set to be followed by the BoJ on Friday, with most analysts expecting it to hold rates after a surprise hike at the end of July sparked turmoil on markets.

"A consecutive hike would likely be seen as too aggressive, especially given criticism that the BoJ's hawkish stance contributed to global market turbulence in early August," said IG analyst Tony Sycamore.

"That said, stronger-than-expected inflation and wage growth in Japan over the past month have given the BoJ confidence in a wage-price cycle that could keep inflation above two percent, paving the way for more policy tightening."

- Key figures around 1100 GMT -