SINGAPORE (Reuters) – Asian shares fell on Monday after traders sharply scaled back expectations of a Federal Reserve interest rate cut this year as the U.S. labor market remains tight, while the announcement of a general election in France sparked widespread political concerns, weighing on the euro.
Trading was thin in Asia due to public holidays in Australia, China, Hong Kong and Taiwan, but the MSCI composite index of Asia Pacific shares excluding Japan still fell 0.46%.
U.S. futures were slightly lower, with S&P 500 futures and Nasdaq futures each down about 0.03%, but the dollar resumed its rise.
The halt in the global risk rally came following Friday’s nonfarm payrolls report, which showed the U.S. economy created many more jobs than expected in May and annual wage growth accelerated again, highlighting the resilience of the labor market.
Futures markets are pricing in about 36 basis points (bps) of Fed rate cuts, down from 50 bps last week, and the odds of an easing cycle starting in September are also rising.
The latest developments come ahead of the Fed’s policy decision on Wednesday, shortly before the release of US inflation data for May.
“It would be very difficult to continue to predict three rate cuts from the Fed this year,” said Rob Carnell, head of Asia Pacific research at ING.
“Many Fed speakers have been talking about the possibility of just one rate cut. Most likely, it will go from three to two, but it could go down to one.”
U.S. Treasury yields also rose on Monday, reflecting expectations that U.S. interest rates will remain high for a long time. [US/]
The two-year Treasury yield and the benchmark 10-year Treasury yield rose about a basis point to 4.8826% and 4.4414%, respectively.
The yen weakened 0.1% against the dollar to 156.87 yen. The dollar index, which tracks the greenback’s relative value against six major currencies, rose to 105.10.
Japan’s Nikkei stock average rose 0.42%, benefiting from a weaker yen.
The Bank of Japan (BOJ) is also holding a two-day monetary policy meeting this week where it may provide new guidance on its plans to scale back its large-scale bond purchases.
Sudden general election
Meanwhile in France, President Emmanuel Macron on Sunday declared early parliamentary elections would be held later this month following the country’s crushing defeat in the European Union membership vote to Marine Le Pen’s far-right party.
Macron’s shock decision has sent political shockwaves through France, giving long-sidelined far-right forces a chance to seize real political power and threatening to cripple the president three years before his term ends.
The euro fell to its lowest in a month following the announcement, down 0.25% to $1.07735, amid growing uncertainty over the future political direction of Europe.
Futures were also down, with Euro Stoxx 50 futures down 0.38% and FTSE futures down 0.7%. French government bond futures were down 0.2%.
“Macron’s decision appears to be a calculated risk and comes at a time when a struggle with his parliamentary majority has made it difficult to advance legislation,” said Seea Lee Lim, chief FX and macro strategist for Asia Pacific at Combera.
“We remain bearish (on the euro) in the near term.”
In commodity markets, crude oil prices rose, reversing a small pre-market decline due to a stronger dollar.
Brent crude futures rose 0.13% to $79.72 a barrel, while US West Texas Intermediate crude futures rose 0.16% to $75.65 a barrel. [O/R]
Spot gold rose 0.18% to $2,296.65 per ounce. [GOL/]
(Editing by Sonali Paul)
