A Day Ahead View in US and Global Markets by Mike Dolan
An eventful but shortened week in the United States begins in the second half of 2024, with European markets recovering on Monday while the first round of French assembly elections points to a suspended parliament and political impasse.
Although the French far-right coalition parties won the largest share of votes in Sunday’s first round, as expected, the percentage was shy compared to last-minute opinion polls and the group appears to fall short of an overall majority when the process ends.
Partly due to high turnout, next Sunday’s second phase of voting will see more than half of the parliamentary seats contested by three candidates – meaning tactical voting to exclude the far right will likely affect their overall tally.
This suggests a result of confusing parliamentary mathematics that impedes meaningful policy initiatives, not to mention another three years of “cohabitation” with the powerful presidency.
Viewed against the “worst-case scenario” concerns of a wave of unfunded tax cuts by the former National Front and its allies, not to mention tense battles with Brussels, investors breathed a partial sigh of relief that everything looked better. confusing than that.
The benchmark French stock index CAC40 jumped more than 2% on Monday – recovering losses seen since early elections were announced almost a month ago and returning to positive territory year-to-date.
The risk premium on 10-year French government bonds relative to German equivalents has fallen to 72 basis points from 12-year peaks of around 85 basis points on Friday.
The euro jumped more than half a cent against the dollar, reaching its best levels in more than two weeks.
This sent the dollar down across the board – with the French results perhaps delaying the reaction to the weak US PCE inflation report for May.
This caused US underlying inflation to fall slightly below the 0.1% expected for the month, and the annual core rate to fall to 2.6% for the first time in three years.
Inflation figures for German states for June also point to a greater easing of national pressures on prices.
Still, Federal Reserve officials appear unwilling to take a month’s return to disinflation at face value and several have insisted they need to see months of this data to be convinced it is safe to cut interest rates.
The European Central Bank has already cut rates this year and appears ready to act at least once more before the Fed takes its first step.
ECB President Christine Lagarde speaks at the bank’s annual forum in Sintra, Portugal, on Monday, and will be joined by Fed Chairman Jerome Powell on Tuesday.
An aggressive message was sent by the Bank for International Settlements on Sunday, warning that rising public debt levels amid a series of key elections this year could disrupt global financial markets.
“They (governments) must reduce the increase in public debt and accept that interest rates may not return to ultra-low pre-pandemic levels,” he said. “We need a solid foundation to build on,” said BIS general manager Agustin Carstens.
Otherwise, the U.S. week is interrupted by the Independence Day holiday on Thursday, but is packed with big labor market data — some of which is brought forward a day earlier because of the holiday. The JOLT jobs release will be released on Tuesday, for example, and the weekly unemployment report on Wednesday – but the national payrolls report will be on Friday, as usual.
Elsewhere, the UK holds its general election while the US is away on Thursday.
Sterling and UK shares were firmer on Monday, with opinion polls still pointing to a large majority of more than 200 seats for the opposition Labor Party.
Meanwhile, Japan’s yen continued to flirt with 38-year lows above 161 per dollar – with no sign yet of any official intervention.
U.S. stock futures and bond yields rose ahead of Monday’s open.
Key developments expected to provide further guidance to US markets later on Monday:
* June U.S. manufacturing surveys from ISM and S&P Global
* New York Federal Reserve President John Williams speaks; European Central Bank President Christine Lagarde speaks at the ECB’s annual forum in Sintra, Portugal
* US Treasury sells 3-month and 6-month bonds
(Reporting by Mike Dolan, Editing by Mark Heinrich mike.dolan@thomsonreuters.com)
