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MORNING BID EUROPE-Oil gets poured on troubled markets

* A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own.

Sept 18 - Saudi oil output is said to be returning to normal by the end of the month end, so the market mood improved a like gold and bonds. U.S. shares closed higher, with the S&P 500 just 1% off record highs. However, tensions in the Middle East are still running high, and things are not quite back to normal yet. Bond yields are flat to lower on the day and stock markets in Europe are opening lower after a similarly weak session in Japan.

U.S. futures are also lower before an event-packed day. The Federal Reserve will almost certainly announce a quarter-point rate cut at 1800 GMT. But what markets really want to see is whether it's a hawkish cut or a dovish one. Will the Fed signal it is embarking on a cycle of sharp rate cuts, or is it going to proceed on a data-by-data basis? The latter may disappoint markets, which have already scaled back the likelihood of a 25-basis-point cut today to 65%; a week back it was all but baked in, according to CME Group’s Fedwatch tool. U.S. industrial production for August released yesterday was better than expected, suggesting the U.S. economy isn’t in dire shape by any means.

But Fed policy has come more into focus after this week’s sudden leap in U.S. funding costs. The overnight repo rate rose as high as 10%, forcing the New York Fed to do a $75 billion repo auction, its first in over a decade. The clear signs of stress may prompt the Fed to resume its balance sheet expansion. The funding rates are back at zero, but another repo auction is due later today. U.S. Treasury yields are lower today, off Friday's 1.908%, the highest in a month and a half. The dollar remains strong, near a seven-week high versus the yen, and a hawkish Fed cut push it higher. Among other central banks, Indonesia's is expected to cut rates later in the day, continuing the story of rate cuts across emerging markets.

Safe-haven asset prices, while off recent highs, continue to be underpinned by events in the Middle East. A U.S. official told Reuters the weekend attacks on Saudi oil operations had originated in southwestern Iran. Israel’s election may be inconclusive, suggesting the end of Prime Minister Benjamin Netanyahu’s decade in power. Israeli stocks were down but the shekel remained unchanged.

In the UK, the Supreme Court continues its hearing today on the legality of Prime Minister Boris Johnson's suspension of parliament. Sterling gained yesterday towards $1.25 as investors trimmed short positions on the pound, after Johnson’s lawyer told the court that he could recall parliament earlier than scheduled if the court rules against him. UK inflation data are due later in the day, but with all eyes on the hearings, the reports may not move markets too much.

Stocks in Europe have opened weaker before the Fed's interest rate decision. In corporate news, FedEx's profit warning overnight citing trade war is likely to cast a shadow on European logistics companies. FedEx shares tumbled 10% in U.S. extended trading. Its European rival Deutsche Post is sliding 3.2% in early Frankfurt trade. DSV , Kuehne & Nagel, Royal Mail, PostNL and other European mail-delivery companies are also expected to come under pressure.

Apple component suppliers could rally following their Asian peers as news on strong pre-orders for the latest iteration of iPhone. AMS, STMicro, Infineon and Dialog Semi are some names to watch out for.

Luxury stocks, mainly Swatch and Richemont, are expected to slide after a bearish note by UBS. Moncler is seen sliding 2% after its CEO said he is cautious on sales due to Hong Kong unrest.

Italian toll road operator Atlantia's CEO resigned as the company moved to deal with the fallout from a deadly bridge collapse last year.

In the UK, Cobham shares are seen opening 3%-5% lower as the UK CMA's intervention in Advent’s merger proposal raises worries of possible rejection. Traders called B&Q owner Kingfisher shares -2% after weak sales and a cautious outlook.

Emerging-market stocks were up 0.3%, with Chinese stocks up a similar amount on expectations of lower borrowing costs at home and in the United States, with improving trade relations between Beijing and Washington aiding risk appetite.

MSCI's emerging market currency index is back in positive territory, with Turkey's lira up 0.3% after a Turkish regulator on Tuesday ordered banks to write off $8.1 billion of loans by year's end and set aside loss reserves in one of the clearest signs of efforts to clean up its economy. South Africa's rand is up ahead of the release on Wednesday of August inflation and retail sales data.

The Taiwanese dollar, Indonesian rupiah and Thai baht are among emerging Asian currencies leading gains against the dollar. Market-sensitive events/data diary for WEDNESDAY Indonesia central bank policy decision Japan sells 20-year government bonds Europe corp events: European July car registrations, Kingfisher earnings Italy July industrial orders, trade balance Germany sells 30-year government bonds UK Aug inflation EZ Aug inflation European Central Bank Vice President de Guindos speaks in Madrid GCC conference in Riyadh SAfrica Aug inflation, July retail sales Russia Aug jobless, retail sales, wages US Aug housing starts, permits Canada Aug inflation Brazil central bank policy decision UN General Assembly in NYC US Federal Reserve policy decision, with press conference by Fed chief Powell

(Editing by Larry King)