LDN - Business

European assets stabilize as investors process French politics

[June 11, 2024] By Alun John and Wayne Cole

LONDON/SYDNEY (Reuters) -European assets found some footing on Tuesday, a day after the announcement of a snap election in France had driven them lower, while investor attention began to turn to the double whammy of U.S. inflation data and a Federal Reserve meeting on Wednesday.

Europe's STOXX 600 index was flat with France's CAC40 up 0.3%, having tumbled 1.35% on Monday.

The euro was steady at $1.0767 after shedding 0.33% the day before, but French government bonds remained under pressure, and its 10-year yield rose 2 basis points to 3.26% having jumped 8 bps on Monday.

With Germany's 10-year yield steady at 2.67%, the spread between the two, a gauge of the premium investors require to hold French debt rather than the euro zone benchmark, widened to 58.6 basis points, its most since January.

The far-right National Rally was forecast on Monday to win a snap election in France but fall short of an absolute majority in the first opinion poll published after President Emmanuel Macron's shock decision to dissolve parliament.

"Snap elections in France was a surprise and raises concern over the reform process when the deficit picture in France is already weak," Mohit Kumar, chief Europe economist at Jefferies, said in a note.

"However, we do not think that political uncertainty opens the door for instability in the Euro area or a break-up of the Euro area. Hence, we would not translate a short France view into a short Italy or Spain view."

Across the channel, investors were digesting data showing Britain's labor market showed more signs of cooling in April as the unemployment rate rose.

While this is unwelcome news for Prime Minister Rishi Sunak ahead of a July 4 election, it could enable the Bank of England to cut interest rates in August. Next week's inflation data will offer a better guide however.

Investors in British mid caps welcomed the news with the sector share index up 0.3%. The pound was down a fraction against the dollar at $1.2723, though the 10 year gilt yield fell 2 basis points to 4.30%.

Elsewhere, markets gave a muted reaction to Apple's long-awaited AI strategy, which integrates "Apple Intelligence" technology across a suite of apps. The iPhone maker's shares shed 0.3% in after hours trade, having slipped 1.9% in normal hours on Monday.

S&P 500 futures and Nasdaq futures both eased 0.1%.

Moves in Asia were mostly modest, with MSCI's broadest index of Asia-Pacific shares outside Japan dipping 0.5% in thin trade. Chinese blue chips fell 1.2%, having been shut on Monday, while the yuan hit a seven-month low.

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Passersby walk past in front of an electric screen displaying Japan's Nikkei share average outside a brokerage in Tokyo, Japan February 13, 2024. REUTERS/Issei Kato/file photo

ONE CUT, OR TWO?

The biggest scheduled economic developments of the week are due on Wednesday, with U.S. consumer price inflation and the Federal Reserve policy decision.

The Fed is considered certain to hold steady at the conclusion of its two-day meeting on Wednesday, with the focus on whether it keeps three rate cuts in its "dot plot" projections for this year.

"We expect the dots to show two cuts in 2024, four cuts in 2025, three cuts in 2026 and a slight tick up in the longer-run or neutral rate," said analysts at Goldman Sachs in a note.

"We think the leadership would prefer a two-cut baseline to retain flexibility, but a one-cut baseline is a possible risk, especially if core CPI surprises to the upside on Wednesday."

The consumer price index (CPI) is forecast to rise a slim 0.1% in May, but with the core up 0.3%.

Rate futures imply 38 basis points of Fed easing for this year, compared to 50 bps before the jobs report.

The other central bank meeting this week is the Bank of Japan, which might decide to taper its bond buying at a policy meeting ending on Friday, as a step toward another rate hike.

Assuming markets aren't disappointed by the size of the change, this could support the embattled yen. The dollar was up 0.2% at 157.38 yen, its highest in a week

Gold was just above one-month lows at $2,306 an ounce, after getting whiplashed by the pullback in market pricing for U.S. rate cuts. [GOL/]

Oil prices consolidated Monday's 3% rally, as investors awaited monthly oil supply and demand data from the U.S. Energy Information Administration and OPEC on Tuesday, and the International Energy Agency on Wednesday. [O/R]

Brent futures were steady at $81.62 a barrel.

(Reporting by Wayne Cole in Sydney and Alun John in London; Editing by Rashmi Aich and Emelia Sithole-Matarise)

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