Tariffs and politics cast a shadow over the markets

A look at the day ahead at Rae Wee’s European and global markets

Investors in Europe will start the week with uncertainty about the global interest rate outlook and the political landscape in the region.

French President Emmanuel Macron rolled the dice on his political future on Sunday and called early parliamentary elections for later this month after being defeated in the European Union by Marine Le Pen’s far-right party.

His shock announcement came as the European Parliament made a shift to the right after four-day elections that concluded on Sunday, with more Eurosceptic nationalists and fewer mainstream Liberals and Greens.

MARKET NERVES

Markets reacted negatively to the news, responding by pushing the euro to a one-month low, while EUROSTOXX 50 stock futures and French bond futures also posted losses.

While the single currency and eurozone assets have largely been cushioned by reduced Euroscepticism compared to the elections of the 2010s and early 2020s, the latest developments could serve as a wake-up call.

When broader European markets open later on Monday, the focus for investors will likely be on the 10-year yield spread on Italian government bonds versus German benchmark paper, which is often used as a barometer of risk appetite in the region.

PRICES FEAR

In the broader market, traders also continued to reel from the fallout from a booming US jobs report ahead of the Federal Reserve’s June policy meeting this week.

The rate-cutting rally that lifted global stocks last week quickly came to a halt and left Asian shares struggling on Monday, although trading was thinned out for holidays in Australia, China, Hong Kong and Taiwan.

While it’s almost a given that Fed policymakers will revise their expectations for three rate cuts this year when they announce their rate decision on Wednesday, the question is to what extent.

Futures indicate around 36 basis points of easing priced in for this year, and the chances of a rate cut ahead of the election remain a toss-up.

Apart from the Fed, the Bank of Japan is also meeting this week, and the central bank is expected to announce a reduction in its massive bond purchases.

That could provide some reprieve for the yen, which was still struggling to rise past the 157 per dollar level against the rebounding greenback on Monday.

Key developments that could impact the markets on Monday:

– Eurozone Sentix index (June)

– Reopening of the auctions of French government bonds with a term of 3, 6 and 11 months

– Reopening of the auctions of German government bonds with a term of 3 and 9 months

(By Rae Wee; editing by Christopher Cushing)