A sharp sell-off in Europe was the catalyst for worldwide market fluctuations on Monday, following the unexpected call from France for an early election. This sent stock prices and government bonds, as well as the value of the euro, into decline.
The knock-on effect saw stock futures in the US hinting at a weak market upon opening in Wall Street. This comes in the midst of a busy week filled with events including the announcement of US inflation data, and meetings for both the Federal Reserve and Bank of Japan, which has furthermore increased a sense of caution.
A major factor for the current caution is the possible political unpredictability in the eurozone’s second largest economy. This follows far-right successes in the European Parliament elections on Sunday which resulted in French President Emmanuel Macron, sombre over recent defeats, to declare an immediate national election.
The euro has dropped to its lowest in a month against the dollar, European stocks saw a decrease of 0.6 per cent, bank shares within the eurozone plummeted 2 per cent and government bond yields in France and Italy went up.
Mark Dowding, chief investment officer at BlueBay Asset Management, highlighted the state of the European market, citing news from France specifically, as it imposed a risk premium on European assets. He suggested that although the situation could worsen, it’s important to remember that this is a parliamentary and not a presidential election in France.
Shares in French banks Societe Generale and BNP Paribas took a heavy hit, down more than 5 per cent and over 4 per cent respectively, as investors expressed concern their funding costs might rise if French sovereign borrowing became pricier due to increased expenditure, according to bank officials.
The yield on France’s 10-year government bond surged 8 basis points to 3.19 per cent, alongside a rise in Italian borrowing costs as well.
Trading in Asia was sparse due to public holidays being observed in Australia, China, Hong Kong, and Taiwan.
The MSCI’s broadest index of Asia-Pacific shares outside of Japan dipped 0.3 per cent, global shares were off by 0.15 per cent, and US equity futures were also generally down.
Worldwide risk rallies had a standstill following the US nonfarm payrolls report on Friday, revealing more job creation than anticipated in May and a rise in annual wage growth, reinforcing the steadiness of the job market.
Expectations now suggest about 36 basis points worth of US rate cuts this year, which is down from 50 basis points last week. The perceived likelihood of an easing cycle starting in September has also been extended.
On Wednesday, the Fed’s upcoming policy decision will be revealed, just ahead of the release of US inflation figures for May.
The Federal Reserve still has efforts to put in place in order to rein in inflation, which remains well above the targeted 2 per cent mark, according to David Arnaud, a senior Fund Manager, Fixed Income, at Canada Life Asset Management. Despite economic growth showing signs of slowing down lately, Arnaud suggests that the Fed could subtly modify their communications regarding forthcoming reductions in interest rates. He adds that a quarter-point cut towards the end of the year is still a probable outcome.
In the bond market, US Treasury yields – which have an inverse relationship with prices – surged on Monday, demonstrative of the long-term expectations of higher US rates. Notably, the two-year yield and the decade-long yield increased by around two basis points each, reaching 4.89 per cent and 4.45 per cent, respectively.
In currency trading, the yen decreased slightly by 0.1 per cent against the dollar to 156.93, whereas the dollar index, revealing the US currency’s performance against a group of six other major currencies, elevated to 105.17.
Meanwhile, in Japan, the Bank of Japan (BoJ) is expected to provide new insights on its future scaling down approaches for its enormous bond-buying policy in its two-day monetary policy meeting this week.
As for commodities, oil prices saw a slight rise, driven by elevated fuel demand expectations this summer. Nevertheless, a robust dollar has limited these gains. Specifically, Brent crude futures hiked by 0.4 per cent to $79.91 a barrel, whereas US West Texas Intermediate crude futures marginally increased by 0.2 per cent to $75.71 per barrel. Equally, spot gold edged higher by about 0.13 per cent, reaching roughly $2,296 an ounce.