By Dhara Ranasinghe
LONDON (Reuters) – A sell-off in Europe set the tone for global markets on Monday as France’s decision to call early elections weighed on everything from the euro to bank stocks and government bonds.
Asian shares fell and US stock futures pointed to a weak open on Wall Street, with an event-packed week including the release of US inflation data and meetings of the Federal Reserve and Bank of Japan adding to the cautious mood.
For now, it’s the prospect of new political uncertainty in the euro zone’s second-largest economy that is weighing on sentiment, after far-right gains in Sunday’s European Parliament elections prompted embattled French President Emmanuel Macron to call early national elections .
The euro fell to a one-month low against the dollar, European shares fell 0.6%, euro zone bank shares tumbled 2%, while government bond yields rose in France and Italy.
“Market movements have everything to do with what we see in a European context – and news out of France has created a risk premium around European assets,” said Mark Dowding, Chief Investment Officer of BlueBay Asset Management.
“It could go a little further, but we have to remind ourselves that these are parliamentary elections and not presidential elections in France.”
French bank Societe Generale (OTC:) last fell more than 5% and BNP Paribas (OTC:) fell more than 4%, as investors worried their funding costs could rise if French government bonds become more expensive amid of higher spending, bankers said.
The yield on French ten-year government bonds rose by 8 basis points to 3.19%, while Italian financing costs also rose.
A BIG WEEK
In Asia, trade was thinned out, with Australia, China, Hong Kong and Taiwan observing public holidays.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, global shares fell 0.15% and US stock futures were also generally lower.
The global risk rally stalled after Friday’s nonfarm payrolls report showed the U.S. economy created far more jobs than expected in May and annual wage growth accelerated again, underscoring the resilience of the labor market.
Futures are now showing around 36 basis points (bps) of US rate cuts announced this year, compared to 50 basis points last week. The chances of an easing cycle starting in September have also increased.
The Fed’s next policy decision comes on Wednesday, with US inflation figures for May due just before that.
“With inflation still well above the 2% target, the Fed has more work to do to tame these forces and will not be in a position to make a rate cut when its committee meets next week” , said David Arnaud, a senior fund manager. , fixed income, at Canada Life Asset Management.
He said that with recent data pointing to a cooling in the economy, the Fed should be able to subtly adjust its message around upcoming rate cuts, with a quarter-point cut in the final three months of the year is still likely.
U.S. Treasury yields, which move inversely to prices, rose on Monday, reflecting longer-term U.S. interest rate expectations. [US/]
The two-year rate and the 10-year benchmark rate each rose by about two basis points to about 4.89% and 4.45%, respectively.
Against the dollar, the yen fell 0.1% to 156.93. The , which measures the dollar against a basket of six other major currencies, was steady at 105.17.
The Bank of Japan (BOJ) is holding a two-day monetary policy meeting this week and could issue new guidance on how it plans to scale back its massive bond purchases.
In commodities, oil prices rose, helped by hopes of rising fuel demand this summer, although gains were limited by the stronger dollar.
futures rose 0.4% to $79.91 per barrel, while U.S. West Texas Intermediate crude futures rose 0.2% to $75.71 per barrel. [O/R]
rose 0.13% to about $2,296 an ounce. [GOL/]
