FintechZoom Brent Crude Insights: Understanding the Global Oil Market

European election fever is running almost as hot as Euro 2024 football tournament excitement, as this weekend's first round of voting in France promises to be market-moving, while Britain may see its first left-of-centre government in 14 years.

England, currently joint favourite with France, along with hosts Germany, are through to the quarter finals of the Euros. But the excitement is not just on the football pitch, or the polling booths. The coming week also brings the market's favourite data point - U.S. monthly employment figures.

Here is your look at what matters for markets in the coming week from Lewis Krauskopf in New York, Rae Wee in Singapore, Yoruk Bahceli in Amsterdam and Andres Gonzalez and Naomi Rovnick in London.

Investors assessing when the Federal Reserve could start to cut interest rates will get a critical economic datapoint with the monthly U.S. jobs report released on July 5.

Economists are forecasting an increase of 180,000 jobs for the month of June. For May, non-farm payrolls increased by 272,000, far more than expected, underscoring the resilience of the labour market.

The Federal Reserve held rates steady this month and pushed out the start of rate cuts to perhaps as late as December, as officials look for more convincing signs that inflation is moderating to the central bank's target, or evidence that the employment market is worsening.

The latest consumer price index report showed U.S. consumer prices were unexpectedly unchanged in May.

Bar chart shows the number of additional non-farm payrolls recorded in the U.S. every month from Jan. 2023 to May 2024. A projection from Reuters poll of economists for June 2024 is included.

Marine Le Pen's far-right National Rally (RN) party scored historic gains to win the first round of France's parliamentary election on Sunday, exit polls showed, but the final result will depend on days of horsetrading before next week's run-off.

Investors are unlikely to get much more clarity before the results of the second round vote on July 7. But a 577-constituency race where candidates just need 12.5% of the vote to make it to the second round, also featuring three-way races, means uncertainty may prevail.

Market jitters over fears of a spending surge have stabilised, helped by a signals from Marine Le Pen's far-right National Rally (RN), leading the polls, that it would be fiscally responsible.

Yet they are far from recovery. The closely-watched risk premium French bonds pay over Germany's is still over 25 basis points higher than before the election announcement. French bank stocks are sitting on double-digit losses.

Another worry for markets has been the left-wing alliance polling second, which many in the market now see as a bigger threat than the RN.

Global M&A volumes in the first half of 2024 have seen an uptick of 20% compared with 2023, and deals exceeding $5 billion have surged by 53%, according to data provided by Dealogic.

But for some dealmakers the glass is only half full.

Despite the recovery, deal volumes as of June 24 remain 15% below the last decade's average, largely impacted by the slowest Q2 in the Asia-Pacific region since 2009.

The number of deals announced in Q2, 2024 is the lowest of the past 16 years, even worse than in Q2, 2020, when COVID-19 forced a worldwide pause in M&A activity.

The remainder of the year looks bleak, with upcoming elections in France, Britain, and particularly in the U.S. causing corporate boards and private equity funds to reconsider their decisions.

Some investment bankers are wondering whether they should focus on 2025 instead, a year they finally hope will deliver the goods.

Polls predict a landslide British election win for the opposition Labour Party on July 4, boosting UK stocks and government bonds, as trade-weighted sterling has bounced back to levels not seen since 2016's Brexit vote.

Traders see a return to stability after heavy political turbulence during the Conservatives' 14-year rule and have speculated Labour leader Keir Starmer will rebuild trade links with Europe.

But Britain has vast fiscal challenges that neither Labour nor the Conservatives have clarified how they would solve, the Institute for Fiscal Studies think-tank said.

Economic growth is tepid, public debt-to-GDP has hit a 63-year high and taxation as a share of national income is approaching its highest since 1949.

If voters expect better public services without tax hikes and investors want government borrowing to stabilise, Starmer could find it tough to keep both sets of stakeholders on side.

Inflation readings across countries in emerging Asia scatter the data calendar, though with consumer prices seemingly coming to heel for most economies it begs the question of how much longer policymakers will need to keep rates higher for.

Yet their hands are tied, with a foot-dragging Federal Reserve and a towering dollar leaving little to no room for any imminent rate cuts in Asia.

It's that or running the risk of their currencies getting hammered further.

In Thailand, that dissonance has sparked a months-long spat between the central bank and government.

The latter insists an urgent rate cut would revive Southeast Asia's second-largest economy, while the Bank of Thailand (BOT) has said rates remain appropriate.

BOT Governor Sethaput Suthiwartnarueput speaks to the media on Thursday, and will likely reiterate the central bank's stance.

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Marine Le Pen's National Rally is on course to win about 33% of the vote, which is what the polls suggested would be the case. Pollsters say National Rally can now win a majority in the National Assembly in Sunday's second round of votes.

For currency markets, the base-case scenario has come to pass as the outcome aligns with pre-election polls.

The Euro's rise confirms the market is now quite relaxed with the prospect of a National Rally government and the 'cohabitation' arrangement that will emerge between the government and President Emmanual Macron.

The worst-case scenario was a stronger showing by the far-left New Popular Front, which we warned could propel the Pound-Euro towards 1.22.

The New Popular Front looks to be on about 29% and Ensemble, Macron’s coalition, on about 22%.

The Pound to Euro exchange rate 'gapped' lower when markets opened late on Sunday night, reversing the gap higher it experienced just weeks prior following the unexpected announcement by Macron that the country would be asked to vote for a new legislature.

Pound-Euro has sliced through the 1.18 level and is now close to levels consistent with the market having removed the political risks premium associated with France. This means there is a growing likelihood the exchange rate will fall back into familiar 2024 territory, which saw trade centred around the 1.17 level.

The Pound-Euro rose following Macron's decision to call a vote as markets feared the uncertainty posed by a radical far-left or far-right party taking power.

The rally peaked at €1.19, the highest level for those buying euros in 22 months, meaning a long-running deadlock between the Pound and Euro was broken. (For most of 2024, the GBP/EUR conversion has been locked between 1.1764 and approximately 1.16.)

During the campaign period, Le Pen's party sought to calm investor fears, saying it would respect the institutions and would fund all its spending commitments, easing fears France's debt levels would ultimately become unsustainable.

Remember, too, that this week, the UK goes to the polls, and any unexpected results could offer some short-term volatility, although we don't anticipate that to last.

In short, it is central bank interest rate settings that matter, and whether the Bank of England will cut interest rates in August.

South Korea on Monday extended its foreign exchange trading hours to provide better access to investors in different time zones.

Financial authorities in the country hope the longer trading hours will help South Korea to win designation as a developed market by the MSCI and allow it to join FTSE Russell's World Government Bond Index.

Following a six-month trial run, dollar-won trading now runs from 9 a.m. to 2 a.m. the following day, whereas it used end at 3:30 p.m., according to the Finance Ministry.

The initiative "moves the Korean won a step forward to its G10 counterparts, which typically trade around the clock," said Shen Li, head of forex sales for the Asia-Pacific at State Street in Hong Kong. Allowing investors in Europe and the U.S. to trade the won at a more convenient time is "perceived as a positive support for Korean bonds to be included in major fixed-income indices," he said.

Around 30 foreign institutions registered with the South Korean government to trade under the new hours, as of Thursday, according to the Finance Ministry.

In 2023, the country's daily dollar-won trades averaged $18.5 billion, up around 7% compared with the previous year, according to central bank data.

While the longer market operation is expected to increase trading volume, "The extent to which trading activities will go up still depends on demand from end investors and supply readiness from qualified registered foreign institutions," State Street's Li said.

The government urged financial institutions doing business in the country to play a leading role in late-night market making, a statement from the Finance Ministry said Thursday. Choi Ji-young, the ministry's deputy minister for international affairs, asked heads of local and foreign banks to "pay attention to staff working night shifts and those assigned to overseas branches, and to ensure stable transaction and payment systems," the statement said.

The longer hours mean overseas investors will gradually shift to forex spot trades and forward transactions from relying on nondeliverable forwards, said Ethan Seo, head of global markets at BNP Paribas in Seoul.

Offshore trading of the Chinese yuan, which took effect in 2010, offers a precedent, he said. While opening up onshore markets to investors overseas round the clock typically takes five to eight years, he predicts it will take around five years for South Korea. He expects banks to be the main users of extended trading hours at first. For the change to take root, he said more global investors should be encouraged to participate, and added that it is important for the country to open up its bond and stock markets as well.

"I think the new system will gain more traction in the long term, considering domestic banks, global banks and the authorities are working on it together," he said.

Initial projections, alongside statements from Macron and Melenchon on Sunday, indicate that the most probable outcome is that no party will achieve an absolute majority, resulting in a 'hung parliament'. Hence, public spending in France is not set to rise significantly (see scenario 1, page 2).

Projections indicate that National Rally (RN) won the first round with around 33.5% of the votes, which translates to 230-305 seats in the National Assembly. A party needs 289 to gain an absolute majority. The left-wing New Popular Front (NPF) came second with around 28.9% (120-200 seats) and Macron's centrist alliance (Ensemble) third with around 21.4% (60-125 seats). The final result is determined on Sunday 7 July.

The most likely scenario (55% probability) is a 'hung parliament' in the National Assembly after the second round. In this main scenario, we thus expect the 10y yield spread between France and Germany to tighten by some 30bp to 40-60 bp within 3 months as fears over spending increases fade.

Due to record-high voter turnout, approximately 300 constituencies will have three candidates in the final round. However, both Macron and left-wing leader Melenchon have pledged to withdraw candidates within the next 48 hours to defeat the RN.

In the "cohabitation" scenario (35% probability) where Le Pen's party, Rassemblement National (RN), wins an absolute majority and Jordan Bardella becomes the next prime minister, we also expect the 10y yield spread between France and Germany to tighten, albeit to a less extend and trade between 50-60 bp within 3 months.

Initial projections, alongside statements from Macron and Melenchon on Sunday, indicate that the most probable outcome is that no party will achieve an absolute majority, resulting in a 'hung parliament'. Hence, public spending in France is not set to rise significantly (see scenario 1, page 2). The second most likely scenario is an absolute majority for the National Rally, especially if third candidates from the NPF and Ensemble do not withdraw as previously stated. Notably for the markets, the scenario where the left-wing NPF secures an absolute majority is considered the least likely, so the worst fears of spending increases should fade.

The most updated projections from four pollsters' show that the National Rally (RN) won the first round with around 33.5% of the votes, which translates to 230-305 seats in the National Assembly. Gaining an absolute majority requires a party to secure 289 seats, and while it is uncertain if National Rally (RN) has achieved this, it appears most likely that they have not. The left-wing New Popular Front (NPF) came second with around 28.9% (120-200 seats) and Macron's centrist alliance (Ensemble) third with around 21.4% (60-125 seats). The projection is not the actual result of the first-round, but it indicates that RN had a slightly worse result than polls suggested and Ensemble and NPF a slightly better result.

In the second round on Sunday, July 7, there will be runoffs between the two candidates who received the most votes along with any third or fourth candidate who garnered more than 12.5% of all eligible votes. Due to the record high voter turnout, it is estimated that around 300 constituencies will feature three candidates. This situation presents a clear advantage for the National Rally, as votes will be split between the centre and the left. However, the left-wing NPF leader, Melenchon, has encouraged all third-placed candidates from his group to withdraw in an effort to unite against the sRN along with Macron's Ensemble. Macron himself has called for "a broad, clearly democratic and republican alliance for the second round." He stated that they would withdraw candidates where they placed third to support those who uphold "the values of the republic" in defeating the National Rally. Candidates now have 48 hours to withdraw in what promises to be a period of intense negotiations that is crucial to monitor.

The most likely scenario (scenario 1, probability: 55%) is a 'hung parliament' where no group or party obtains an absolute majority in the National Assembly. In this scenario, the new government will need to seek ad-hoc support for legislation, necessitating compromise. Given the division in the French parliament we find it unlikely that the new government can find support for any larger increases in spending. As the government needs to use the so-called article 49.3 to pass legislation (including the budget) through without a majority, we find large changes in policies unlikely as it then requires that the government survives a "no confidence" vote. Consequently, we should expect a status quo in France and its public finances. In this main scenario, we thus expect the 10y yield spread between France and Germany will tighten to 40-50 bp within 3 months as fears over spending increases fade.

In the "cohabitation" scenario (scenario 2, probability 35%) where Le Pen's party, National Rally (RN), wins an absolute majority and Jordan Bardella becomes the next prime minister, we expect only a gradual implementation of the party programme and no large immediate increases in public spending. This is supported by the fact that RN has rolled back the costliest initiatives from the previous campaign. Bardella, who is the prime minister candidate has particularly softened his rhetoric's on EU and public spending and in a recent FT interview Bardella said that "I do not intend to go to war with Brussels" and that the EU fiscal rules of a maximum deficit of 3% of GDP "remains an objective" and that "it will require me to prioritise". Moreover, Bardella said he will undertake an audit of French public finances before deciding on spending priorities in the autumn. However, we note that his first priority will be to cut the VAT on energy and petrol, which will cost EUR12bn a year (0.4% of GDP) which he intends to fund this by raising various taxes, cutting tax loopholes and the France's contribution to the EU budget. Yet, we assess that ambitions of turning the fiscal policy substantially more expansionary will be dampened by the risk of exclusion from EU/ECB support programmes or possible punishment in financial markets. Hence, in the scenario where Le Pen's party wins an absolute majority, we also expect the 10y yield spread between France and Germany to tighten to 50-60 bp within 3 months.

In the third scenario, also a "cohabitation" situation, the left-wing New Popular Front (NPF) coalition secures an absolute majority (scenario 3, probability: 10%). Here, we anticipate an increase in public spending and potential confrontations with the EU. Unlike Bardella and RN, the left-wing alliance has maintained a firm stance in its communications recently. They want to increase spending by some €EUR150bn (5% of GDP) by 2026-2027, lower the pension age from 64 to 60, and at the same time increase taxes similarly in order not to increase the deficit. However, as details on funding are sparse and the risk of anti-establishment increases, we expect the immediate reaction in this scenario will likely be a significant increase in the spread between France and Germany to 100-150 bp within 3 months. Whether the government then will be able to work together in such a scenario is very uncertain though as the NPF coalition consists of four very different parties with contrasting views on topics such as Russia and Israel. Especially, it is important to note, that the left-wing coalition includes a more modest party like the socialist party with former president François Hollande, and we do not think they would tolerate market turmoil going this badly for a prolonged period, as they would lose all credibility of them being fit to govern in the future.