Stocks pull back as acrimonious U.S. debate stokes caution

By Marc Jones and Tom Westbrook

LONDON/SINGAPORE (Reuters) - World stocks fell and safer assets such as the yen and dollar found buyers on Wednesday after a chaotic first U.S. presidential debate and rising COVID-19 cases turned investors cautious, though strong factory surveys boosted China's markets.

President Donald Trump and Democratic rival Joe Biden battled over Trump's record on the coronavirus pandemic, healthcare and the economy in a bad-tempered first debate marked by personal insults and Trump's repeated interruptions.

U.S. stock futures had nudged higher early during the debate but then retreated as Trump cast doubt on whether he would accept the election's outcome if he lost.

Asian trading had been choppy rather than outright weak but Europe main markets were down as much as 0.5% <0#.INDEXEM> amid worries too over the steep rises in coronavirus infections across the region again.

"The debate just added to the confusion about how the election will run," said SEB investment management's global head of asset allocation Hans Peterson. "But financially it doesn't change anything".

S&P 500 futures were last 0.5% lower, with Dow Jones and Nasdaq 100 futures down by as much as 1%.

The U.S. dollar crept higher and is set for its best monthly gain since July 2019, while the yen rose 0.2% to 105.50 per dollar, its strongest daily rise in nearly two weeks.

"The only point worth mentioning is that the debate may have increased expectations for a contested election result," said UBS' chief economist Paul Donovan said "Given the importance of international investors to U.S. markets, this may add volatility around the election."

Markets globally, most of which are headed for their first monthly retreats since March's meltdown, either deepened losses or pulled back from highs scaled after data showed China's economic recovery remains on track.

MSCI's broadest index of world shares which tracks nearly 50 countries dropped 0.2% for a 4% September loss. Oil is down just over 10% this month, while gold's 4.1% drop will make it its worst month since late 2016.

Asia had held its ground overnight, led by a 0.8% gain in Hong Kong, though Japan's Nikkei fell 1.5% and Australia's S&P/ASX 200 lost over 2%.

Chinese property developers gained, led by a 15% jump in Evergrande shares after the heavily-indebted giant reached a deal to ease cash crunch concerns.

China's factory activity expansion accelerated in September, helped by rising export orders.

The official manufacturing Purchasing Manager's Index (PMI) rose to 51.5 in September from 51.0 in August. Analysts had expected it to pick up slightly to 51.2.

(Graphic: World's main stock indexes in 2020 - https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwjlogvw/Pasted%20image%201601242322314.png)

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CONTESTED RESULT

The presidential debate yielded no clear winner and barely moved the needle in betting markets, which project a narrow Biden victory. Odds maker Smarkets slightly lowered Trump's chance of re-election to 40% after the debate from 42% beforehand.

But as the election draws closer, investors are increasingly expecting a bumpy final lap and are bracing for the possibility that the result is unclear on polling day.

Options trade points to a volatile November. Two-month dollar/yen volatility, a gauge of expected moves in the yen, is elevated, and its premium over one-month volatility is near record levels.

On Wednesday, major currencies eased against the dollar after the debate, The euro dipped from a one-week high to back below $1.17, Germany's Bund yield hit a two-month low, and the risk-sensitive Australian dollar fell 0.2% to $0.7118, heading for its worst month since March.

Biden said in the closing stages of the debate he would accept defeat if he lost at the ballot box and would not claim victory prematurely.

Trump, who has refused to commit to a peaceful transfer of power if he loses the election, repeated unfounded allegations that mail-in voting would lead to fraud.

"I don't think we were expecting anything else from Trump," said Chris Weston, head of research at Melbourne brokerage Pepperstone. "He continues to put that contested (result) risk premium back into the market."

Elsewhere, oil prices fell amid rising concerns about fuel demand as the coronavirus pandemic worsens.

Brent crude futures were last down 0.9% at $40.66 a barrel and U.S. crude futures were down 0.7% at $39.00 a barrel. Gold slipped 0.4% to 1,890 an ounce.

(Graphic: Global financial markets in 2020 - https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgjzggpq/Pasted%20image%201601285806186.png)