By RaeWee
SINGAPORE (Reuters) – Asian shares fell on Monday as traders severely scaled back bets on Federal Reserve rate cuts this year given a still-tight U.S. labor market, while a snap election call in France sparked broader political concerns and weighed on the euro.
Trading was thinned out in Asia, with Australia, China, Hong Kong and Taiwan missing the festive season, but MSCI’s broadest index of Asia-Pacific shares outside Japan still fell 0.46%.
US futures fell slightly, with S&P 500 futures and Nasdaq futures down about 0.03% each, while the dollar returned to prominence.
The halt to the global risk rally followed Friday’s nonfarm payrolls report, which 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 now show about 36 basis points (bps) of cuts priced in for the Fed, compared to 50 basis points last week. The chances of an easing cycle starting in September have also increased.
The latest developments anticipate the Fed’s policy decision on Wednesday, with US inflation figures for May due just before that.
“It will be very difficult for the Fed to continue forecasting three rate cuts this year,” said Rob Carnell, ING’s regional head of research for Asia-Pacific.
“Quite a few Fed speakers are talking about the possibility of just one (cut). While the most likely outcome is that we’ll see three go to two, it’s possible we’ll just get a step to one.”
Yields on US government bonds also rose on Monday, reflecting longer-lasting US interest rate expectations. [US/]
The two-year and 10-year benchmark rates each rose about 1 bp to 4.8826% and 4.4414%, respectively.
Against the dollar, the yen fell 0.1% to 156.87. The dollar index, which measures the dollar against a basket of six peers, rose to 105.10.
Japan’s Nikkei benefited from the weaker yen and rose 0.42%.
The Bank of Japan (BOJ) also holds its two-day monetary policy meeting this week and could provide new clues about how it plans to scale back its massive bond purchases.
SPICK ELECTION
In France, President Emmanuel Macron on Sunday called early parliamentary elections for later this month after being defeated in European Union elections by Marine Le Pen’s far-right party.
Macron’s shock decision caused a political earthquake in France, giving the far right a chance at real political power after years on the sidelines and threatening to neuter his presidency three years before it was due to end.
The euro fell to a one-month low in the wake of the announcement, amid growing uncertainty about Europe’s future political direction. It was last down 0.25% at $1.07735.
Futures also fell: EUROSTOXX 50 futures lost 0.38%, while FTSE futures fell 0.7%. French bond futures fell 0.2%.
“Macron’s decision, seen as a calculated risk, comes as he struggles with a parliamentary majority, making legislative progress difficult,” said Shier Lee Lim, Convera’s APAC head of FX and macro strategist.
“We remain bearish on the euro in the short term.”
In the commodities sector, oil prices were last higher, reversing slight declines from earlier in the session due to a stronger dollar.
Brent crude futures rose 0.13% to $79.72 per barrel, while U.S. West Texas Intermediate crude futures rose 0.16% to $75.65 per barrel. [O/R]
Spot gold rose 0.18% to $2,296.65 an ounce. [GOL/]
(Editing by Sonali Paul)
