EMEA Morning Briefing: Investors Weigh France Political Gridlock

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Germany foreign trade; trading updates from Repsol, Galp Energia

Opening Call:

European stock futures were higher at the start of the week. Asian stock benchmarks were broadly lower; U.S. Treasury yields edged higher; the dollar consolidated; oil futures and gold declined.

Equities:

European stock futures were tracking higher despite a negative lead from U.S. stock futures. The surprising outcome of the second round of French elections will be in focus with investors watching how French government bonds, French banking stocks, the CAC-40 index, and the euro react.

The New Popular Front, a coalition of leftist parties, is projected to win the most seats in France's parliamentary elections but fall far short of a majority, raising the specter of a hung parliament. Citi Research analysts cautioned that France could undergo prolonged political instability and opacity.

The U.S. inflation data is another highlight this week after the jobs report for June showed signs that the labor market is softening. Traders were pricing in a 75% probability of easing at the Fed's September meeting. Stocks could be choppy over the next few months as investors wait for more clarity about inflation.

"You have to be poised for more volatility, but that could create an entry point," said Cindy Beaulieu, chief investment officer of Conning North America. "If you get a pullback, there could be a buying opportunity."

Fed Chairman Powell's two-day testimony before lawmakers will also be in focus along with the start of the corporate earnings season.

Forex:

EUR/USD may fall early this week, with the left-wing New Popular Front coalition projected to have won the most seats in France's National Assembly, CBA's Global Economic & Markets Research said.

The parties in the coalition want a big increase in spending that will raise France's already large budget deficit and debt, it noted. Though well short of a majority, at least some parties in the coalition will probably be influential in a new government, if one can be agreed, it added.

An "ineffective government and risks of a rising debt profile certainly won't do EUR any favors over months ahead," TD Securities strategists said.

Bonds:

The newly-elected Labour government is expected to uphold fiscal discipline, a move likely to lower the yields on U.K. government bonds, or gilts, David Zahn, head of European fixed income at Franklin Templeton, said.

"We anticipate Labour wanting to maintain the fiscal responsibility without any major structural changes which should be supportive for U.K. gilts, especially as we anticipate the Bank of England to embark on their interest rate cutting cycle," he said.

Investors will focus on Labour's first budget in October to understand the government's plans for the economy, spending, and funding, Zahn added.

Energy:

Oil fell in Asia as traders digest the mixed U.S. employment report released Friday. That has kept market participants guessing about the health of U.S. consumers, and thereby demand for oil, said Fawad Razaqzada, market analyst at City Index and forex.com.

This week, market participants will likely want to monitor inventories data for whether the recent decline in stockpiles was just an anomaly or whether more oil will be drawn from inventories, the analyst added.

"If we see more drawdowns, then this should further support the oil-price recovery."

Metals:

Gold is lower in early Asian trading in a possible technical correction.

"With likely future Fed rate cuts and dollar weakness, gold prices are likely to rise on trend," said Jason Schenker, president of Prestige Economics. "Further slowing of U.S. inflation, increased geopolitical and political risks, and dollar weakness are poised to send gold prices higher."

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Copper edged higher with prices heading towards $10,000/ton as market sentiment was lifted by increasing expectations for the Fed's monetary policy easing, ANZ Research analysts said.

Also, recent data from the Shanghai Metals Market showed that the premium paid on imported copper reverted to positive territory for the first time in almost two months as China demand slowly recovers, ING said.

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Iron-ore prices declined. Markets likely have some doubt on the sustainability of the recovery in the Chinese property sector, the ANZ Research team said.

Chinese port inventories for iron ore have also continued to increase, reflecting a weaker offtake from steel mills for metal production, they added.

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July 08, 2024 00:15 ET (04:15 GMT)

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