Asia Stocks Falter, Euro Gains After French Election Surprise

Asian stocks remained subdued on Monday as investors grappled with the outlook for U.S. interest rates. Meanwhile, the euro gained strength following the first-round voting in France’s snap election, where the far-right made a surprising advance, albeit with a smaller share than some polls had anticipated.

The unexpected election results have unsettled markets, with both the far-right and the left-wing alliance pledging substantial spending increases. This comes at a time when France’s high budget deficit has led the EU to recommend disciplinary measures.

On Monday, the euro rose by 0.32%, while European stock futures climbed 1%, and French OAT bond futures gained 0.15%. Investors found some relief in the results, despite lingering uncertainties.

Exit polls indicated Marine Le Pen’s National Rally (RN) secured approximately 34% of the vote, outpacing leftist and centrist rivals. However, the RN’s chances of gaining power next week hinge on political negotiations in the coming days.

“Perhaps the result isn’t as bad as the market had feared,” noted Michael Brown, senior strategist at Pepperstone. “There’s also rhetoric from other parties about pulling out candidates to prevent the National Rally from winning seats in the runoff next Sunday, which may provide some market comfort.”

Attention now shifts to next Sunday’s runoff. The outcome will depend on how parties align in each of France’s 577 constituencies, potentially resulting in an RN majority. “Investors are worried that a National Rally majority in the French Parliament could lead to clashes with the EU, disrupting European markets and the euro,” said Vasu Menon, managing director of investment strategy at OCBC.

In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.07%, marking a 7% rise so far in 2024. Japan’s Nikkei gained 0.57%.

Chinese stocks declined, with blue chips down 0.45%, while Hong Kong’s Hang Seng Index remained flat. A private sector survey revealed China’s manufacturing activity grew at its fastest pace in over three years, driven by production gains despite slowing demand growth. This contrasted with the official PMI released on Sunday, which indicated a decline in manufacturing activity.

Macro-economic focus remains on the Federal Reserve’s potential rate cuts following data showing U.S. monthly inflation was unchanged in May. The PCE price index rose 2.6% in the 12 months through May, slightly down from April’s 2.7%. These figures met economists’ expectations but remain above the Fed’s 2% inflation target. Markets are still betting on at least two rate cuts from the Fed this year, with a 63% probability of a September cut, according to the CME FedWatch tool.

U.S. stocks ended lower on Friday after an early rally lost momentum. In currency markets, the yen traded around 160.98 per dollar following a rare unscheduled revision to Japan’s GDP data, showing a larger-than-expected economic contraction in the first quarter. Japan’s factory activity remained stagnant in June amid weak demand and rising costs due to the yen’s depreciation. The yen fell to 161.27 on Friday, its weakest level since late 1986, keeping traders alert for potential intervention from Japanese authorities.

The euro touched a two-week high of $1.076175 in early Asian trading, pushing the dollar index slightly lower to 105.59.

In commodities, oil prices edged higher, with Brent futures up 0.39% at $85.33 per barrel, and U.S. West Texas Intermediate crude futures rising 0.42% to $81.88.