SINGAPORE: Asian stocks were subdued on Monday as traders pondered the U.S rates outlook, while the euro rose after the first-round voting in France’s shock snap election was won by the far-right, albeit with a smaller share than some polls had projected.
The shock vote has unsettled markets as the far-right, as well as the left-wing alliance that came second on Sunday, have pledged big spending increases at a time when France’s high budget deficit has prompted the EU to recommend disciplinary steps.
On Monday, the euro was 0.32% higher, while European stock futures rose 1% and French OAT bond futures gained 0.15% as investors digested the better than feared results, although uncertainty remained.
Exit polls showed Marine Le Pen’s National Rally (RN) winning around 34% of the vote, comfortably ahead of leftist and centrist rivals but the chances of eurosceptic, anti-immigrant RN winning power next week will depend on the political dealmaking by its rivals over the coming days.
“Perhaps the result isn’t as bad as the market had feared,” said Michael Brown, senior strategist at Pepperstone.
Asia shares eye five-month winning streak; yen buckles under dollar strength
“We’ve also seen a lot of rhetoric form other parties looking to perhaps pull out candidates to try and avoid the National Rally winning seats in the runoff next Sunday … The market may be taking a little bit of solace in that.”
The focus now shifts to next Sunday’s runoff and will depend on how parties decide to join forces in each of the country’s 577 constituencies for the second round, and could still result in a majority for RN.
“Investors are concerned that if the far-right National Rally party wins a majority in the French Parliament, this could set the stage for France to clash with the EU, which could disrupt Europe’s markets and the euro sharply,” said Vasu Menon, managing director of investment strategy at OCBC.
In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.07% higher, to kick off the second half of the year having risen 7% so far in 2024. Japan’s Nikkei rose 0.57%.
China stocks eased, with blue-stocks down 0.45%. Hong Kong’s Hang Seng Index was flat.
A private sector survey on Mondayshowed China’s manufacturing activity grew at the fastest pace in more than three years due to production gains, even as demand growth slowed.
The Caixin/S&P Global manufacturing PMI data contrasted with an official PMI released on Sunday that showed a decline in manufacturing activity.
On the macro side, the spotlight remains on if and when the Federal Reserve will start cutting rates in the wake of data on Friday showing U.S. monthly inflation was unchanged in May.
In the 12 months through May, the PCE price index inc reased 2.6% after advancing 2.7% in April. Last month’s inflation readings were in line with economists’ expectations. They remain above the Fed’s 2% target for inflation.
Still, markets are clinging to expectations of at least two rate cuts from the Fed this year with a cut in September pegged in at 63% probability, CME FedWatch tool showed.
U.S. stocks on Friday ended lower after an early rally fizzled.
Among currencies, the yen traded around 160.98 per dollar after the government, in a rare unscheduled revision to gross domestic product (GDP) data on Monday, said Japan’s economy shrank more than initially reported in the first quarter.
Data also showed Japan’s factory activity stayed unchanged in June amid lacklustre demand and as companies struggled with rising costs due to the weak yen.
The yen skidded to 161.27 on Friday, its weakest level since late 1986, keeping traders on edge as they look for signs of intervention from Japanese authorities.
The euro touched a more than two week high of $1.076175 in early Asian hours, pushing the dollar index, which measures the U.S. unit against six rivals, a touch lower at 105.59.
In commodities, oil prices edged higher, with Brent futures 0.39% higher at $85.33 per barrel and U.S. West Texas Intermediate crude futures up 0.42% at $81.88.
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