Japanese markets tumble after leadership contest

• Japanese markets tumble after leadership contest.

• Chinese equities soar as stimulus helps lift sentiment.

• UK GDP and Eurozone inflation dominates.

European markets are on the back foot in early trade, following on from an Asian session that saw huge volatility across the board. Friday saw Ishiba claim victory in a LDP leadership battle that looked to determine the Japanese Prime Minister, with the Nikkei falling by 4.8% on the prospect of tighter monetary policy and higher taxes. While Ishiba has announced plans to hold an early election in a bid to patch up a party that has been split by the recent leadership contest, the dominance of the LDP should keep a lid on market volatility.

Chinese stocks have continued their recent surge, with the Shanghai Composite gaining over 8% in a move that brought the gains over the past week to a whopping 22%. A surprise rebound in the Chinese manufacturing PMI helped lift the metric to a five-month high of 49.8. Coming in the wake of the recent raft of stimulus measures announced by the PBoC and government, there is a hope that we could finally see the country turn a corner. Nonetheless, while news of fresh stimulus can help lift sentiment for markets, the continuation of this rally will necessitate an uplift in activity in the real estate and consumer segments of the economy.

A busy morning for European data has seen UK GDP for the second quarter fall back to 0.5%, cooling optimism for the pound. The downward revisions seen for Q2 highlights a potential need to provide greater support for the economy going forward. Nonetheless, the European inflation data provides the central focus for traders this morning, with the Italian metric falling to 0.7% in a continuation of the disinflation theme that saw Spanish (1.5%) and French (1.2%) CPI tumble on Friday. With a raft of German regions having all seen similar weakening in their annual inflation metrics, we can look ahead to tomorrows eurozone CPI release with confidence that we will likely see a significant decline that should see a move back below the 2% target.