Ray Wee’s outlook for European and global markets
European investors will start the week preoccupied with uncertainty over the outlook for global interest rates and the regional political situation.
French President Emmanuel Macron on Sunday bet on his own political future by announcing early parliamentary elections later this month following his country’s crushing defeat in the European Union membership vote to Marine Le Pen’s far-right party.
His shock announcement came as the European Parliament has shifted to the right after four days of elections that ended on Sunday, with eurosceptic nationalists on the rise and mainstream liberals and Greens on the decline.
Market tensions
Markets reacted negatively to the news, sending the euro down to its lowest in one month, while Euro Stoxx 50 stock index futures and French government bond futures also fell.
While reduced euroscepticism has largely eased the common currency and euro area assets compared to elections in the 2010s and early 2020s, recent developments could be a warning signal.
When European markets open later on Monday, investors’ attention will be on the yield spread between Italian 10-year government bonds and benchmark German bonds, often used as a barometer of risk appetite in the region.
Interest rate anxiety
Across markets, traders remain jittery over the impact of strong U.S. employment data ahead of the Federal Reserve’s June policy meeting this week.
Asian shares were weak on Monday, with interest rate cut pressures that buoyed global stocks last week quickly fizzling out, although public holidays in Australia, China, Hong Kong and Taiwan led to thin trading.
Fed policymakers, who announce their interest rate decision on Wednesday, are almost certain to lower their forecast for three rate cuts this year, but the question is how much.
Futures prices suggest about 36 basis points of easing are priced in this year, with the possibility of a rate cut before the election remaining a game of chance.
Besides the Fed, the Bank of Japan is also meeting this week, with the central bank expected to announce a reduction in its massive bond purchases.
This may provide some relief for the yen, which was still struggling to rise above the 157 yen per dollar level against the U.S. dollar after recovering on Monday.
Key trends that could impact markets on Monday:
– Eurozone Sentix Index (June)
– Resumption of auctions of 3-, 6- and 11-month French government bonds
– German Bund auctions resume for 3-month and 9-month maturities
(Writing by Ray Wee; Editing by Christopher Cushing)
