How Will the Surprise French Election Result Affect the EURO, CAC40 And Bonds?

Economic

Stocks

Summary:

Political upset in France with left-wing and not right-wing alliance winning a relative majority is likely to lead to political gridlock.

Political upheaval in France

The left-wing New Popular Front (NPF) unexpectedly won a relative majority in the recent French legislative elections, beating expectations that the far-right National Rally would prevail. However, NPF's victory may prove short-lived amid likely political infighting over forming a governing coalition.

NPF, an alliance of leftist parties including the greens, socialists, communists and France Unbowed, secured 182 seats - more than any other party but short of the 289 needed to control parliament. President Macron's centrist Together coalition took 163 seats, while the far-right National Rally (NR) took 143, far less than polls had suggested.

No clear mandate

Despite the highest voter turnout since 1981, the election produced no clear winner. France now faces a split parliament and a shift of power from the presidency to the National Assembly. The opposing ideologies of potential coalition partners threaten gridlock in forming a workable government.

While the National Rally had a disappointing election, it still increased its presence in parliament significantly, gaining an additional 54 seats compared to just a couple of years ago. The result leaves open the possibility of further far-right gains in the 2026 mayoral and 2027 presidential elections.

Uncertainty reigns

The messy election outcome plunges France into political uncertainty. President Macron must postpone policy plans until a governing majority emerges. Meanwhile, Prime Minister Attal's impending resignation leaves confusion over new leadership during a sensitive time.

Forming a leftist "rainbow coalition" looks unlikely given policy divides. If no alliances congeal, Macron may resort to installing a technocratic caretaker government to maintain stability amid economic concerns. But such a move risks public backlash.

More political uncertainty lies ahead for Europe's third largest economy

With no quick resolution in sight, France faces the spectre of persistent legislative paralysis and turbulence which could have a profound impact on its credit rating, French bond yields, stocks and the euro.

Financial market reaction

As of early trading on Monday morning, French 10-year government bond yields traded at 3.23%, marginally above Friday's 3.20% low, the French/German OAT/Bund spread briefly at 3-week lows before trading back at Friday's levels of around 0.69%.

The euro depreciated versus several major currencies with EUR/USD trading lower at $1.0815, EUR/GBP at £0.8447 and EUR/JPY at ¥173.89.

In overnight trading the CAC 40 slid by around 0.6% but this could partly have been on the back of Asian markets falling ahead of this week's US and China inflation data, although the slide in French equity indices seems to be more pronounced than that of its European peers.

Technical analysis on French CAC 40

The front month CAC 40 futures contract, which on Friday flirted with its 24 June high at 7,744 and briefly rose to a 3-week high at 7,752.5, dropped to the 200-day simple moving average (SMA) at 7,636.5.

CAC 40 daily candlestick chart

Source: TradingView.com

While the major French stock index stays above its mid-to-late-June lows at 7,468-to-7,460 but trades below Friday's 7,752.5 high, it remains within a sideways trading range.

A break out of this range will likely determine the next medium-term trend.

A rise and daily chart close above last week's 7,752.5 high would confirm a double bottom chart formation and put the early-to-late May lows at 7,890-to-7,911 on the cards, as well as the 55-day SMA at 7,905 and the psychological 8,000 mark.

En route lies the May-to-July downtrend line at 7,796 which needs to be breached first.

Only a fall through the 7,460 June low could provoke a slide towards the January low at 7,284 and perhaps even lead to the 7,000 region being revisited.

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Warren Takunda

Economic

Forex

The polls were wrong; it wasn't Marine Le Pen's RN party that won the election; instead, they came third. Against expectations, a coalition of left-wing and far-left-wing parties secured the most seats and will now have a chance at forming a government.

The Euro's selloff reflects the market's initial unease with this development as France faces a period of political and fiscal uncertainty at a time when its finances are already on a rocky setting. Pound Sterling Live previously reported that a win for the leftist bloc would be a worst-case outcome for French markets and Euro exchange rates. But this outcome was seen as a low-risk probability after its unconvincing performance in last week's first round of votes.

The left-wing New Popular Front (Left Alliance, or NFP) won 182 seats, compared with 168 for Macron's coalition Ensemble and 143 for the far-right Rassemblement National and its allies.

"There is a risk that the hard-left Jean-Luc Mélenchon is appointed prime minister. And even if he isn’t, parliamentary gridlock will hinder efforts to get the public finances on a sustainable footing," says Jack Allen-Reynolds, Deputy Chief Euro-zone Economist at Capital Economics. "We think investors will probably judge that the election has avoided the worst possible outcomes: a majority RN or NFP government. But things still don’t look good for France."

289 is needed to secure a majority, meaning France is set for a 'hung parliament'. To be sure, this was expected; what was not expected was the left being the biggest bloc.

"France now in for period of frantic, chaotic coalition building," says veteran political broadcaster Andrew Neil.

The Pound to Euro exchange rate trades 0.13% higher on the day at 1.1835 and the Euro to Dollar is down 0.16% at 1.0820.

Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, said recently that GBP/EUR would rise if the New Popular Front (NFP) wins:

"The EUR/GBP 3M-6M outlook would depend on the outcome of the French rather than the UK election. Key in that would be the FX impact of wider government credit spreads to Bund yields after the French vote. Our simulation results suggest that EUR/GBP could dip towards 0.82 or even lower in response to a Left-wing alliance victory."

EUR/GBP dipping to 0.82 "or even lower" equates to a rise in the Pound to Euro exchange rate above 1.22.

But this is Not a Worst-case Outcome for the Euro

The Euro's sell-off is relatively contained because although NFP won, they needed more seats to form a majority. They will be unable to pursue policies that would result in a worst-case outcome for the Euro that involves significant spending commitments.

"Some uncertainty has been eliminated from markets by the results, as public spending in France is most likely not set to rise significantly since both the left-wing and far-right fell short of an absolute majority. A possible majority government in a coalition including Ensemble necessitates compromises and favours status quo given the different views on fiscal policies the parties in a broad coalition will have," says Rune Thyge Johansen, an analyst at Danske Bank.

Pound to Euro Rate Rallies After Leftists Come First in France_1

Image courtesy of Danske Bank.

The NFP has revealed spending plans are significant and would require a sizeable increase in borrowing, something bond markets would struggle to accommodate.

The NFP is a coalition of left-wing parties that includes Jean-Luc Mélenchon’s France Unbowed, the Socialist Party, the French Communist Party and the Greens. It plans to raise the monthly minimum wage to €1,600, impose price ceilings on essential foods, electricity, gas and petrol, repeal Macron’s deeply unpopular decision to raise the retirement age to 64 and invest massively in the green transition and public services.

Prime Minister Gabriel Attal said their agenda would present France with a "fiscal drubbing".

Attal has since stood down following the vote.

Source: Poundsterlinglive

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Cohen

Economic

Southeast Asia’s IPO market declined significantly in the first six months of 2024, with market capitalization plunging 71% to $5.8 billion, a report from Deloitte showed.

The region saw only 67 initial public offerings in the first half, with that number falling by 21.2% compared to the same period a year ago. The amount raised from these IPOs dropped 53.3% year on year to $1.4 billion.

There were no blockbuster IPOs from January to June, with only one large IPO with market capitalization of more than $1 billion and raising more than $200 million, Deloitte said. In the same period a year ago, there were three large IPOs which raised more than $600 million each.

This marks a continued downward trend that began in the second half of 2022, according to Deloitte data.

The downward trend signals “subdued IPO market sentiments where investors and IPO candidates continue to navigate macroeconomic factors,” Deloitte said.

Still, the report pointed out that historically, the latter half of the year “has always been the better performing half between 2020 to 2022.”

“Despite a positive growth outlook and increasing foreign direct investment in Southeast Asia, the prolonged geopolitical instability and high interest rates environment have been the significant factors affecting the market conditions and investor sentiments in Southeast Asia,” said Tay Hwee Ling, Deloitte’s Southeast Asia accounting and reporting assurance leader.

High interest rates may persist in 2024 as governments address inflation concerns, Deloitte analysts warned.

Against this backdrop, investors geared toward “proven profitability and sustainable cash flows” instead of the growth-at-all-cost business model that many companies adopted from 2020 to 2022.

IPO fundraising in Indonesia plunges

Indonesia, in particular, saw the most pronounced drop among all the Southeast Asian countries.

“Indonesia, which topped the 2023 [Southeast Asia] IPO charts, experienced a significant decline in the first half of 2024, as investors and IPO aspirants adopted a wait-and-see approach in light of the presidential elections in February 2024 and in anticipation of new economic policies,” Deloitte’s analysts said.

Market capitalization of Indonesian listings plunged 92.2% to $1.22 billion from January to June while IPO proceeds raised fell 89.1% to $248 million compared to a year ago. The number of Indonesian listings in the first six months of this year fell to 25 from 44 in the same period last year — down 43.2%.

“While Southeast Asia’s IPO market may appear subdued in 2024, there is cautious optimism that conditions will improve beyond 2024,” said Tay.

Tay said there is anticipation of lower interest rates ahead which could encourage the return of REIT [real estate investment trusts] listings, while artificial intelligence-related IPOs could hit the market in the near future as many AI companies are still in the early stages.

“We anticipate a significant wave of AI IPOs tapping on the IPO capital markets in the coming years, bringing innovation and new opportunities to the market,” Tay said.

Source:CNBC

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Economic

Stocks

The S&P 500 and the Nasdaq ended last week at fresh record highs following cooler labour market data which heightened expectations that the Fed will deliver its first rate cut in September. For the week, the Nasdaq gained 3.60%, the S&P 500 added 1.95%, and the Dow Jones added 257 points (+0.66%).

Labour market data insights

Friday's non-farm payrolls data showed the economy added 206,000 jobs in June, in line with expectations. However, April and May's numbers were revised lower by a combined 111,000 jobs. Providing further evidence of cooling, the unemployment rate increased to 4.1% from 4% despite an increase in the participation rate to 62.6% from 62.5%. Lastly, average hourly earnings increased by 3.9% year-on-year (YoY) in June, the lowest since June 2021.

Key events this week

This week, the key events on the US economic calendar are the consumer price index (CPI) and producer price index (PPI) data for June, Fed Chair Powell's semi-annual testimony on monetary policy to the Senate Banking Committee and the start of the US Q2 2024 earnings season. The US rates market starts this week pricing in 19 basis points (bp) of Fed rate cuts in September, with a total of 53 bp of Fed rate cuts priced before year-end.

What is expected from US CPI

In May, the annual rate of inflation in the US unexpectedly slowed to 3.3% YoY from 3.4% in April, below forecasts of 3.4%. The annual core inflation rate eased to 3.4% YoY in May from 3.6% in April, for its lowest reading in three years.

The cooler CPI readings were followed in the same session by a more hawkish than expected Federal Open Market Committee (FOMC) meeting as the Fed's Summary of Economic Projections (SEP) dots showed just one 25 bp cut is expected in 2024 vs. the three rate cuts forecast in March.

Fed's stance and upcoming data

Fed Chair Powell, speaking at the Sintra Forum in Portugal last week, sounded dovish and described "real progress on inflation." This, along with softer growth and labour market data last week, has increased confidence that the Fed will start cutting rates in September.

Further confidence will be gained if this week's CPI data is in line with or below market expectations. The preliminary expectation is for headline inflation to fall to 3.1% YoY from 3.3% prior. Core inflation is also expected to remain stable at 3.4% YoY. S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_1

S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_1

S&P 500 technical analysis

The S&P 500 was in unstoppable form from the middle of last week, as it surged above weekly trend channel resistance at about 5500 to finish at record highs – once again wiping away potential signs of loss of upside momentum.

Providing the S&P 500 remains above support at 5500, there is scope for the rally to extend towards 5750. While we aren't inclined to chase it higher here, we wouldn't be fighting the move higher.

S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_2

Nasdaq 100 technical analysis

Last week, the Nasdaq 100 surged above recent highs and weekly trend channel resistance at around 20,050. As can be viewed on the monthly chart below, the magnitude of the rally from the October 2023 low makes the bear market of 2022 seem a lot less significant than it was.

While we wouldn't be chasing the Nasdaq at these levels, given the parabolic nature of the rally, a move towards 22,000 doesn't seem unrealistic in the months ahead. S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_3

S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_3

A daily close below support at 20,050/20,000, as seen on the daily chart below, would be an indication that the uptrend may have run its course and that a corrective pullback is underway. S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_4

S&P 500 And Nasdaq Hit Record Highs; Fed Rate Cut Expected In September_4

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ING

Economic

Forex

USD: Inflation and Powell in focus this week

The dollar is modestly stronger out of the weekend as a surprise win of the left-wing alliance in the French second-round legislative elections sent European currencies lower and fuelled some safe-haven demand, with the Japanese yen and Swiss franc rising. We discuss the French vote in detail in the EUR section below.

This week will be a hot one for US macro, with the CPI report for June out on Thursday. We expect the core print at 0.2% month-on-month, in line with consensus, which should be enough to keep markets betting on a September rate cut, which is now 83% (19bp) priced in.

We are also seeing the pricing for total easing in 2024 starting to inch above 50bp again after Friday's jobs report saw a slightly above-consensus payroll print (206k), but -111k of net revisions for the two previous months and unemployment rising from 4.0% to 4.1%. As discussed here, about three-fourths of hiring was in health care and government, and private payrolls undershot expectations. There is a clear weakening trend emerging in the US jobs market and that will, in our view, push an FOMC that wants to avoid unnecessary economic pain to cut three times this year, starting in September.

This week also sees Federal Reserve Chair Powell's testimony to Congress (Tuesday-Wednesday). We stick to our view that if any surprising message emerges from Powell's communication, it will be on the dovish side after an excessively hawkish revision in the June Dot Plot projections.

All in all, we expect the macro story to keep pointing to a dollar decline, but political developments in the eurozone and the US mean that only a few currencies can benefit from it, and that may not include the euro. By extension, the downside risks for the euro-heavy DXY index may be relatively limited. Today's US data calendar is rather quiet, and there are no scheduled FOMC speakers.

EUR: Markets still assessing French election result

The second round of parliamentary elections delivered a surprise result. While it was widely projected that Marine Le Pen's Rassemblement National (RN) would fall short of a majority, the left-wing alliance Nouveau Front Populaire (NFP) unexpectedly won more seats (182) than any other party. President Emmanuel Macron's centrist group came in second with 163 seats and the RN alliance secured 143. This means a hung parliament and two main scenarios: difficult coalition talks or a technocratic government.

The positive market reaction after the first round, which had seen an RN victory, gave an indication that investors were more comfortable with the far right than with the far left, which is perceived as a greater danger to the already fragile French fiscal position. One of the leaders of the NFP, Jean-Luc Melenchon said the NFP plans to strictly implement its programme, which includes an increase in public spending to support social measures including higher minimum wages and an unwinding of Macron's reform that increased the retirement age.

Those fiscal concerns are probably behind the euro trading around 0.2% below its Friday close at 1.0820 after having tested 1.0800 last night. We are waiting for the bond markets to open and will closely monitor OAT-Bund 10-year spread – now at 65bp. Our rates team still sees some rewidening risks as a hung parliament will struggle to deliver any fiscal consolidation and there are some risks related to a potential left-wing government. But the 80bp area could be the limit given the centrist group came in second, offering some balance and potentially thwarting spending plans. Quite intuitively, markets will favour a technocratic government as opposed to an NFP-led coalition.

From an FX perspective, there are lingering risks for the euro moving on, and we continue to see the common currency as a likely laggard in the G10 space in an environment that can still support pro-cyclical currencies on the back of softening US data.

The absence of market-moving data releases in the eurozone this week and the European Central Bank about to enter the quiet period ahead of its 18 July meeting will contribute to making the coming days all about French political developments. We think EUR/USD can trade below 1.08 on the back of that before US macro developments take over.

GBP: BoE speakers are back

Markets are monitoring the first week of Keir Starmer as UK Prime Minister following an uneventful election day for sterling and gilts. Our UK economist James Smith takes a deep dive into British fiscal issues and what the new government can do to avert a cut in spending without higher taxes via tweaks to the fiscal rules.

We doubt that fiscal prospects will have an impact on the pound just yet, while developments in French politics, US macro and Bank of England rate expectations will remain the largest GBP drivers. BoE officials are due to start speaking publicly again following a quiet period before the election, with hawkish external member Jonathan Haskel delivering remarks today, and Huw Pill and Catherine Mann (another hawk) speaking on Wednesday.

The UK data calendar includes May GDP (Thursday) but is relatively quiet before next week's June inflation report. We see some downside risks for GBP/USD this week given the spillover from EU political risk, which however means that a return in EUR/GBP steadily above 0.8500 has been delayed further.

CEE: Inflation numbers should please central bankers

We will see most of this week's events in the region in the first half. The Czech market is back after Friday's holiday. So with a delay, we will see Czech National Bank minutes from the June meeting when the central bank cut rates by 50bp to 4.75%. The minutes will show the names of the two members voting for the 25bp step and a discussion of the next rate cut. On the economic front, we'll see industrial production data in the Czech Republic and final GDP data in Romania was released this morning. Inflation for July will be released tomorrow in Hungary. We expect the headline rate to fall from 4.0% to 3.7% year-on-year, below market expectations. However, core inflation remains higher at 4.0%. We will also see inflation in the Czech Republic on Wednesday. Here, we expect a decline from 2.6% to 2.5% YoY, slightly above the market expectation, and a further decline in core inflation. On Friday, industrial production and labour market data will be released.

Conditions for CEE FX have generally improved in recent days and we could see some further gains across the board. EUR/USD is around the highest level since mid-June and so far this has been ignored by CEE FX, especially in EUR/CZK. At the same time, core rates have rallied more than CEE rates and the rate differential has risen especially in Poland's zloty. And generally, the market remains in risk-on mode after the US jobs data. On the other hand, inflation numbers in the Czech Republic and Hungary are more on the dovish side for central banks and could be negative for FX. So the picture is quite mixed but unless we see more significant surprises we should still be stronger in CEE FX at the end of the week.

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Commodity

Crude oil prices rose more than 6 percent in June after OPEC plus extended its production cut and on hopes of increased summer fuel demand in the US. Furthermore, the threat of a wider Middle East conflict and dangers from intensifying hurricanes lifted the positive momentum. However, the latest energy agency report suggests world oil demand is expected to slow down in the coming years.

The US WTI and the Asian Brent contract saw significant gains during the period. The US WTI recovered its early losses and settled above $82-barrel last week. Similarly, Asian Brent oil regained momentum from a low of $77 per barrel to $87 followed by the OPEC decision. Domestic MCX futures also mirrored the trend.

The OPEC plus cartel, which includes Russia, agreed to extend most of its deep oil production cuts into 2025 in the latest meeting held in early June. They also announced that the production cuts would be extended by another 2.2 million bpd by the end of September 2024. This decision was to shore up the market amid tepid demand growth, high interest rates, and rising US output. The combined output cut of the cartel is currently a total of 5.86 million barrels per day, which comes to about 5.7 percent of global demand.

Nowadays, the Asian oil demand is one of the key drivers of global oil prices. As per the agencies like OPEC and IEA, China’s oil demand will grow in 2024 when compared to the previous year. However, China’s oil imports in the first half of this year have declined and if there is a somewhat brighter light in Asia, it’s India. Indian crude imports in the first half of 2024 are up about 90,000 bpd compared to the same period last year.

The ongoing Israel-Hamas war has led to increased instability and conflict in the region and poses risks to the oil markets. Worries over potential supply shortages are affecting market sentiments. Earlier, attempts taken by various countries to cool down the tensions have put downward pressure on global oil prices.

The solid summer transport demand and uncertainty over the impact of hurricanes on oil production and consumption in the US also led to a positive price outlook. There is a conviction that the US stocks will be drawn in the coming months due to seasonal demand. The hurricane season in the Atlantic started with Hurricane Beryl last week.

However, the latest US IEA report predicts a slower oil demand in the coming years due to energy transition advances. Global oil production is believed to ramp up in the next few years amid easing market strains and pushing spare capacity by major market players. The agency also foresees a well-supplied oil market till 2030 as well.

The agency predicts global oil markets will show a major surplus this decade due to slowing demand growth and surging supplies. Strong demand from fast-growing economies like Asia is set to drive oil use higher but those gains will increasingly be offset by rising EV sales, energy-efficient conventional vehicles, and structural economic shifts.

The ongoing supply-demand dynamics are not promising for the prices. The seasonal demand from the US and the extension of OPEC plus production cut may bring some positive momentum, but it is unlikely to continue as supplies might beat demand in the long run. Nevertheless, traders should cautiously track the ongoing geopolitical crisis, global growth outlook, the performance of the US dollar, and the Fed’s rate cut decisions to set a firm direction on the commodity.

Source:Economic Times

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Samantha Luan

Economic

Despite the earlier predictions of many, and to the dismay of borrowers, the end of the rate rise cycle has not yet arrived.

In early August, the Reserve Bank will once again weigh up persistent inflationary pressure and in doing so, it must also assess the high cost of housing.

This means giving due consideration as to why that cost is so high and what further rate rises will do to this cost in the future.

The latest CoreLogic Home Value Index shows the median dwelling price in Sydney reached another new record of over $1,156,020 in June, growing a further 0.5 per cent during the month, to be up 6.3 per cent for the just-completed financial year.

Obviously, high house prices and rents contribute significantly to inflation but these are not discretionary costs and therefore should not be viewed in the same way as other items in the RBA’s inflation basket.

The potential for a rate rise typically dampens activity in the real estate market. Yet, the main indicators remain fairly positive. Auction clearance rates remain strong and volumes are solid, with transactions continuing to occur at a steady rate, as evidenced in stamp duty revenue.

When the final numbers are in, the NSW Government will have pocketed more than $1 billion extra from property buyers in stamp duty in FY2024 than it did in FY2023. It’s another reminder of the huge contribution property consumers make to the economy and just how much Government relies on the industry to keep the state afloat.

This overdependence on property is about to intensify following the Government’s Budget announcement that singles out property owners for more pain through land tax reforms.

It’s unreasonable and short-sighted.

Removing land tax indexation means more and more properties will be captured as values inevitably rise. Government’s plan amounts to letting the increase in property values do the work of increasing taxes and will exacerbate the housing crisis. It increases costs for owners, mortgage holders and renters.

As investors know, the cost of holding a residential property is high. More tax will place more pressure on returns, leaving landlords two bad options: pass the extra cost onto tenants or sell their investment property, taking more homes out of the undersupplied rental market.

Strata management crackdown

Together with the coming strata reforms aimed at cracking down on rogue strata managers, signalled by the Minister for Better Regulation and Fair Trading last month, the landscape is changing for investors.

It’s important for people to feel confident investing in strata schemes and it’s worth noting the vast majority of strata managers add significant value to Owners Corporations in what can be a dynamic and challenging regulatory environment.

It’s also important for people to feel confident investing in residential property as an asset class, and this is where bad regulations like tax disincentives are having a counterproductive impact.

A residential property can be a sound investment from a capital growth perspective but the cost burdens faced by property investors are incomparable to those who choose other investment assets.

The opportunity for proper reform still exists and is becoming ever more urgent.