European stocks fall on interest rate outlook, French poll: Markets Wrap

(Bloomberg) — European shares fell after policymakers said they need more evidence that price pressures are easing before considering another rate cut.

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The benchmark Stoxx Europe 600 fell about 0.5%, led by insurers and automakers. France’s CAC 40 erased most of Monday’s gains as the country prepares for a second round of elections, with the outlook for French assets still uncertain. U.S. stock futures fell.

While inflation likely slowed further in June, the data will not answer the European Central Bank’s lingering questions about underlying price pressures, Chief Economist Philip Lane said. He joined President Christine Lagarde and Vice President Luis de Guindos in saying another rate cut in July is unlikely as the ECB gathers evidence that inflation is moving towards its 2% target.

“We expect inflation to have come down a little bit,” said Frederique Carrier, head of investment strategy at RBC Wealth Management. Still, Lagarde “has conveyed the message very well, so we don’t expect a change in July, but rather in September and December,” she said.

The rally in European stocks has stalled in recent weeks due to political unrest following a call for early elections in France. The first round of parliamentary elections narrowed the possible outcomes to two, both of which herald prolonged uncertainty for investors. The second round of voting is scheduled for Sunday.

“We expect France to be more difficult to govern and there will be fewer reforms. That is not positive,” Carrier said.

Meanwhile, the 10-year Treasury yield pared some of Monday’s gains on speculation that a Donald Trump presidency would lead to larger U.S. budget deficits and higher inflation. A gauge of the dollar rose for a second day.

“The dollar is supported by the jump in US Treasury yields overnight,” said David Forrester, senior strategist at Credit Agricole CIB. “The irony is that it is investor concerns about US fiscal sustainability that are driving US Treasury yields higher.”

Treasuries have swung this year as traders alternated between buying bonds amid signs of cooling U.S. prices and fears of higher rates for longer. Yields on five-year notes have risen more than 20 basis points from a low of about 4.20% just less than three weeks ago.

The story continues

After last week’s debate hurt Joe Biden’s re-election prospects, Wall Street strategists — including those at Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc. — are taking a fresh look at how a Trump victory could play out in bond markets. They’re urging clients to position for persistent inflation and higher long-term yields.

Strategists at JPMorgan Chase & Co., on the other hand, said now is the time to cash in on Treasury gains.

Federal Reserve Chairman Jerome Powell’s speech at an ECB forum in Portugal could provide more clues about the outlook for policy. ECB’s Lagarde is also scheduled to speak. Traders will also be watching U.S. job openings data later on Tuesday.

Among individual stocks, shares of foodservice company Sodexo SA fell after it reported third-quarter revenue that missed estimates. Michelin shares also fell in Paris, with analysts citing a pre-close call after markets closed Monday. HelloFresh SE shares rose after JPMorgan said data showed stabilization in its key North American meal-kit business.

Asian stocks gain

Asian stocks rose, led by gains in Japan and Hong Kong. The MSCI AC Asia Pacific Index hit its highest since late May amid a rally in shares of Hong Kong-listed property and electric vehicle makers.

Japan’s equity benchmark edged closer to a record high, supported by gains in financial stocks on prospects of higher borrowing rates. Domestic 10-year yields continued to climb above 1% on bets the central bank would raise policy rates.

In China, pessimism about the domestic economy has fueled demand for government debt. The central bank said it will borrow government bonds from primary dealers, a sign it may be considering selling securities to cool the rally.

Yields on China’s benchmark bonds fell to a record low on Monday as investors worry about long-term economic growth.

In commodities, oil hit a two-month high on an escalation of tensions in the Middle East and concerns about the early start of the Atlantic hurricane season. Iron ore held a roughly one-month high. Gold was little changed.

Important events this week:

• Eurozone CPI, Unemployment, Tuesday

• Jobs in the US, Tuesday

• Jerome Powell and Christine Lagarde to speak at ECB forum in Portugal, Tuesday

• China Caixin Services PMI, Wednesday

• Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday

• US Fed Minutes, ADP Employment, ISM Services, Factory Orders, Initial Jobless Claims, Durable Goods, Wednesday

• Fed’s John Williams to speak Wednesday

• UK General Election, Thursday

• American Independence Day, Thursday

• Eurozone retail sales, Friday

• US Jobs Report, Friday

• Fed’s John Williams to speak Friday

Some of the major moves in the markets:

Shares

• The Stoxx Europe 600 was down 0.5% at 09:13 London time

• The French CAC 40 fell 0.6%

• S&P 500 futures fell 0.3%

• Nasdaq 100 futures fell 0.4%

• Futures on the Dow Jones Industrial Average fell 0.3%

• The MSCI Asia Pacific Index was little changed

• The MSCI Emerging Markets Index fell 0.6%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro fell 0.2% to $1.0723

• The Japanese yen fell 0.1% to 161.66 per dollar

• The offshore yuan remained virtually unchanged at 7.3063 per dollar

• The British pound fell 0.2% to $1.2629

Cryptocurrency

• Bitcoin fell 1.4% to $62,376.28

• Ether fell 1% to $3,429.48

Bonds

• The yield on 10-year government bonds fell two basis points to 4.45%

• The German 10-year yield fell by two basis points to 2.59%

• The UK 10-year yield fell three basis points to 4.26%

Raw materials

This story was produced with the help of Bloomberg Automation.

–With assistance from Jason Scott, Sagarika Jaisinghani, and Aya Wagatsuma.

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