Rates and politics cast a shadow over markets

A look at the day ahead in European and global markets by Rae Wee

European investors will begin the week uncertain about the outlook for global interest rates and the region’s political landscape.

French President Emmanuel Macron rolled the dice on his political future on Sunday, calling early parliamentary elections later this month after being defeated in the European Union vote by Marine Le Pen’s far-right party.

The shock announcement comes as the European Parliament has shifted to the right after four days of elections that ended on Sunday, with more Eurosceptic nationalists and fewer traditional liberals and Greens.

MARKET NERVES

Markets took the news negatively and reacted by sending the euro to its lowest level in a month, while EUROSTOXX 50 stock and French bond futures also posted losses.

Even though the eurozone’s common currency and assets have been largely dampened by waning Euroscepticism compared to elections in the 2010s and early 2020s, the latest developments could serve as a wake-up call.

When European markets open later on Monday, investors will likely focus on the yield gap on 10-year Italian government bonds versus benchmark German bonds – often used as a barometer of appetite for risk in the region.

ANGST RATES

In the broader market, traders also continued to feel reeling from the U.S. jobs report, ahead of the Federal Reserve’s June policy meeting this week.

The surge in rate cuts that sent global stocks soaring last week quickly came to a halt and left Asian stocks struggling on Monday, although trading was slowed by holidays in Australia, China, Hong Kong and in Taiwan.

While it’s almost a given that Fed policymakers will reverse their forecast of three rate cuts this year when they announce their rate decision on Wednesday, the question is by how much.

Futures are pointing to about 36 basis points of easing planned for this year, and the chances of a rate cut before the election remain uncertain.

Aside from the Fed, the Bank of Japan also meets this week and the central bank is expected to announce a reduction in its massive bond purchases.

This could provide some respite for the yen, which was still struggling to strengthen beyond the level of 157 per dollar in the face of the greenback’s resurgence on Monday.

Key developments that could influence markets on Monday:

– Sentix Eurozone Index (June)

– Reopening of French public debt auctions at 3 months, 6 months and 11 months

– Reopening of German public debt auctions at 3 and 9 months

(By Rae Wee; editing by Christopher Cushing)

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