By Ankur Banerjee
SINGAPORE (Reuters) – Asian stock prices fell on Monday as traders worried about the outlook for U.S. interest rates. The euro rose after the far right won the first round of voting in France’s surprise snap election, although its share was smaller than some polls had predicted.
The surprise result has roiled markets as the far right and the left-wing alliance, which finished second on Sunday, promised sharply higher spending. This while France’s high budget deficit has prompted the EU to propose disciplinary measures.
On Monday, the euro was 0.32% higher, while European stock futures rose 1% and French OAT bond futures rose 0.15% as investors digested better-than-feared results, although uncertainty remained.
Exit polls showed Marine Le Pen’s National Rally (RN) winning around 34% of the vote, well ahead of its left-wing and centrist rivals, but the chances of the eurosceptic, anti-immigrant RN coming to power next week will depend on the political deal its rivals strike over the elections in the coming days.
“Maybe the outcome isn’t as bad as the market feared,” said Michael Brown, senior strategist at Pepperstone.
“We have also seen a lot of rhetoric from other parties who may want to withdraw candidates to try to prevent the National Rally from winning seats in the second round next Sunday… The market may be able to take some comfort from that.”
The focus now shifts to next Sunday’s second round and will depend on how parties decide to join forces in each of the country’s 577 constituencies for the second round, and this could still result in a majority for RN.
“Investors are concerned that if the far-right Rassemblement National party wins a majority in the French parliament, it could trigger a clash between France and the EU, which could seriously disrupt European markets and the euro,” said Vasu Menon, director of investment strategy at OCBC.
In Asia, MSCI’s broadest index of Asia-Pacific stocks outside Japan rose 0.07%, starting the second half of the year with a 7% rise so far in 2024. Japan’s Nikkei rose 0.57%.
Chinese stocks fell, while blue stocks fell 0.45%. Hong Kong’s Hang Seng index was flat.
A private sector survey on Monday showed China’s manufacturing activity grew at the fastest pace in more than three years thanks to output growth, even as demand growth slowed.
The Caixin/S&P Global PMI data for the manufacturing sector contrasted with an official PMI released on Sunday that showed a decline in manufacturing activity.
On the macro side, the spotlight remains on whether and when the Federal Reserve will begin cutting rates, in the wake of data on Friday that showed U.S. monthly inflation was unchanged in May.
In the 12 months through May, the PCE price index rose 2.6%, after rising 2.7% in April. Last month’s inflation figures were in line with economists’ expectations. They remain above the Fed’s inflation target of 2%.
Still, markets are clinging to expectations that the Fed will make at least two interest rate cuts this year. According to the CME FedWatch tool, the probability of a cut in September is estimated at 63%.
US stocks closed lower on Friday after an earlier rally fell apart. [.N]
The yen traded around 160.98 per dollar after the government said on Monday, in a rare, unscheduled revision to gross domestic product (GDP) data, that Japan’s economy shrank more sharply in the first quarter than initially reported.
Data also showed Japan’s factory activity was flat in June amid subdued demand and as companies struggled with rising costs due to the weak yen.
The yen fell to 161.27 on Friday, its weakest level since late 1986, keeping traders on alert for signs of intervention from Japanese authorities.
The euro hit a more than two-week high of $1.076175 in early Asian hours, leaving the dollar index, which measures the U.S. unit against six rivals, slightly lower at 105.59.
In commodities, oil prices rose slightly, with Brent crude futures closing 0.39% higher at $85.33 a barrel and U.S. West Texas Intermediate crude futures rising 0.42% to $81.88. [O/R]
(Editing by Stephen Coates)
