Ankur Banerjee
SINGAPORE (Reuters) – Asian shares were flat on Monday on uncertainty over the outlook for U.S. interest rates, while the euro rose after a surprise first round victory for France’s far-right party in a general election, although its share of the vote was smaller than some opinion polls had predicted.
The shock vote rattled markets as the far-right party and the left-wing coalition that came second on Sunday promised big spending increases at a time when France’s huge budget deficit has led the EU to recommend punitive measures.
The euro rose 0.41% on Monday, European stock futures rose 1.4% and French OAT bond futures rose 0.15% as investors digested the better-than-expected results but uncertainty remained.
“There is a widespread sense of relief that the first round of the French election was not as totally in favour of Le Pen as the opinion polls suggested,” said Tony Sycamore, market analyst at IG.
“This raised hopes that the National Rally would not win a majority or loosen its purse strings. The proposal had unsettled the French bond market and the euro.”
Exit polls showed Marine Le Pen’s National Rally (RN) party winning around 34% of the vote, giving it a significant lead over its left-wing and centre-right rivals, but the eurosceptic, anti-immigration party’s chances of taking power next week will depend on political negotiations between its rivals over the coming days.
The focus now shifts to next Sunday’s runoff election, which will depend on how parties work together in France’s 577 constituencies for the second round, with the RN still likely to win a majority.
“Investors are concerned that if the far-right Rally National party wins a majority, it could trigger a clash between France and the EU, causing sharp turmoil in European markets and the euro,” said Basu Menon, managing director of investment strategy at OCBC.
In Asia, MSCI’s broadest index of Asia-Pacific shares ex-Japan fell 0.04%, after gaining 7% so far in 2024 following a subdued start to the second half of the year.
Chinese stocks were mixed, with blue chips down 0.19% and the Shanghai Composite Index up 0.31% on mixed data.
Factory activity at small and medium-sized manufacturers in China grew at the fastest pace since 2021, helped by overseas orders, but the industrial sector contracted again due to weak domestic demand and trade tensions.
On the macro front, attention remains on when the Federal Reserve will start cutting interest rates after US monthly inflation figures for May were released on Friday showing flat growth.
For the 12 months through May, the PCE price index rose 2.6% after rising 2.7% in April. Last month’s inflation rate was in line with economists’ expectations but still above the Fed’s 2% inflation target.
Still, markets are clinging to expectations of at least two rate cuts from the Fed this year, with the CME FedWatch tool putting the chances of a cut in September at 63%.
Investor attention this week will be focused on the minutes of the Fed’s June meeting, which will provide further clues about the central bank’s thinking, before attention turns to Friday’s jobs report, which in February predicted just one rate cut in 2024.
The yen was trading slightly weaker at 161.06 yen to the dollar after falling to 161.27 yen on Friday, its lowest since late 1986, as traders watched for signs of intervention from Japanese authorities.
Business sentiment in Japan’s services sector worsened in June, a quarterly survey released by the central bank on Monday showed, as an unusual and unexpected downward revision to the country’s GDP data also showed the economy shrank more than reported in the first quarter.
The euro hit its highest level in more than two weeks at $1.076175 in early Asian trading, while the dollar index, which compares the U.S. currency with six other currencies, was slightly lower at 105.61.
In commodity markets, crude oil prices edged up, with Brent crude futures up 0.39% to $85.33 per barrel and US West Texas Intermediate crude futures up 0.39% to $81.86. [O/R]
(Editing by Stephen Coates and Miral Fahmy)
