A look at the day ahead in the US and global markets by Samuel Indyk
The expected shift to the right in the European Parliament after four-day elections has continued to shake European markets, as gains for the far right in France prompted French President Emmanuel Macron to call early parliamentary elections.
French bonds and shares sold off as the euro fell, as investors looked for an exit amid political uncertainty.
French banks were among the hardest hit, with BNP Paribas (OTC:), Credit Agricole (OTC:) and Societe Generale (OTC:) all down between 4.5% and 7.4%.
It’s a major negative shift after what seemed like a more positive outlook for Europe.
The European Central Bank started cutting borrowing costs last week after the steepest tightening cycle on record, inflation is drifting back toward target and surveys have shown growth may have bottomed out.
In contrast, the Federal Reserve looks unlikely to cut rates until the fourth quarter, growth appears shaky – albeit after more robust growth at the start of the year – and inflation appears more persistent.
So as global investors increasingly focus on European markets, election results and increased political uncertainty could trigger a shift in sentiment.
At least that is clear for now. France’s main stock index fell 1.9%, dragging down other European markets. 100, the Spanish IBEX and the Italian IBEX were all trading between 0.4% and 1%.
Still, US futures were relatively unperturbed. E-mini is down about a quarter of a percent, while Nasdaq futures are down a similar amount.
French bonds are as unloved as the stock market.
The difference between the 10-year yields of France and Germany, a benchmark for risk premium investors who want to hold French bonds over German paper, has widened by more than 6 basis points.
The euro fell 0.4% against the dollar, to its lowest level in a month.
The US day is looking calmer, but given the US CPI figures and the conclusion of the June Fed meeting on Wednesday, this is not expected to remain that way for long.
Markets are pricing in a near certainty that the Fed will hold rates this week, while a July cut is also almost completely out of the question. September is now just a 50/50 shot.
A change in tone from the Fed this week or softer CPI data could again have markets betting on more than one rate cut this year.
Key developments that should give more direction to US markets later on Monday:
* Data on US employment trends
* US will start selling 3- and 6-month notes and 3-year notes
