Excited US looks at French distress and domestic problems in China

A Day Ahead View in US and Global Markets by Mike Dolan

Wall Street stocks and bonds remained relatively buoyant after last week’s action-packed macro week, with world markets more drawn to French political uncertainty and a deepening decline in Chinese domestic prices.

With trouble brewing overseas, Wall Street stock futures held line near last week’s new highs on Monday as Goldman Sachs raised its 2024 year-end S&P500 target to 5,600 from 5,200 before and of 5,431 at Friday’s close.

The investment bank cited strong earnings growth from the five mega-cap technology stocks and a higher fair value price-to-earnings ratio.

While long-term U.S. Treasury yields fell below 4.2% last week for the first time since April 1, as disinflation resumed alongside an aggressive policy tilt by Federal Reserve policymakers , the dollar rose anyway and recorded its best week in almost two months.

This is largely due to investors’ fear of French President Emmanuel Macron’s decision to call early legislative elections for next month, with the French far-right rising in the polls in this month’s European elections.

With French sovereign credit ratings in balance and nerves surrounding the fiscal implications of a change in parliamentary majority, the yield premium on French 10-year public debt relative to Germany soared to its highest level last week since 2017, by more than 77 basis points.

France’s benchmark CAC40 stock index slid 4.6% during the week, underperforming Wall Street and world indices by 6.8% and 5.5% respectively.

Although both French stocks and bonds calmed somewhat on Monday, potential turmoil in the heart of the eurozone sent the euro falling to six-week lows against the dollar on Friday – recovering only modestly on Monday. fair to recover a position above 1.07.

Wider spreads on eurozone government debt also widened, although eurozone equities stabilized on Monday.

Global equity strategists at Wall Street bank Citi cut European stocks from overweight to neutral, citing rising political risks in France.

European Central Bank chief economist Philip Lane said on Monday that the turmoil in euro zone bond markets, centered on France, has not been disorderly so far, effectively downplaying the need for ECB intervention.

“What we’re seeing in the markets is a repricing, but that’s not the case in the world of disorderly markets right now,” Lane said in an interview with Reuters NEXT Newsmaker at the London Stock Exchange.

The situation in Asia was no better after the latest monthly analysis of China’s economic data and with the People’s Bank of China keeping key interest rates unchanged.

The story continues

While China’s retail sales surpassed forecasts in May, industrial production fell short of expectations.

But following new deflationary signals from China last week, the real estate sector remains the main concern.

Chinese new home prices fell 0.7% in May, marking the 11th consecutive monthly decline and the sharpest drop since October 2014. This comes as the central bank last month announced a re-loan program for residential housing. affordable prices to accelerate sales of unsold housing stock.

Chinese stocks and the offshore yuan fell.

Japan’s Nikkei stock index underperformed, falling nearly 2% below the psychologically key 38,000 level for the first time this month, as a mood of risk aversion prevailed amid concerns about economic growth both internal and external level.

Toyota Motor fell 2.6% amid ongoing fallout from a certification scandal, with auto-related stocks among the worst-performing sectors. National broadcaster NHK reported that Toyota would extend the suspension of production of affected models for at least another month, until the end of July.

Japanese Prime Minister Fumio Kishida also said on Monday that he has no plans to instruct or request the government pension fund to buy the Bank of Japan’s holdings in exchange-traded funds.

Kishida also said the government and the Bank of Japan (BOJ) share the view that consumption has lacked momentum as wages have not increased enough to offset rising prices.

With doubts about the timing of further tightening by the Bank of Japan, the dollar also rose against the yen

Top daily items that could guide US markets later on Monday:

* New York Fed June manufacturing survey; Housing starts in May in Canada

* New York Fed President John Williams, Philadelphia Fed President Patrick Harker and Fed Board Governor Lisa Cook speak; The Vice President of the European Central Bank, Luis de Guindos, speaks

* US Treasury auctions 3-month and 6-month notes

* US Corporate Profits: Lennar, Quantum

(Reporting by Mike Dolan, Editing by Sharon Singleton mike.dolan@thomsonreuters.com)