European Midday Briefing: French Stocks Surge With Hung Parliament Seen Likely

MARKET WRAPS

Stocks:

European shares moved higher on Monday with French stocks seeing their strongest rise in almost two years after the first round of parliamentary elections in France suggested the far-right National Rally party was unlikely to form a majority government.

There's optimism in the European markets, Conotoxia fintech said. However, the likely minority government will probably face a difficult "cohabitation," and the political scene is unlikely to be stable.

French banks, which were hit sharply when the snap elections were announced, posted the biggest gains early Monday.

"We expect relatively high share price volatility with fundamentals likely to remain largely out of focus this week as well for the French banks," Deutsche Bank said, noting the resilience of the lenders.

Citi agreed that French banks will remain volatile until the second round of elections.

"Our rates and equity strategists' analysis seem to indicate the market is currently broadly pricing in a deadlock scenario, with downside to OAT/Bund spreads and equity if an extreme party wins the second round," Citi said.

The implied cost of equity for French banks has increased by around 330 basis points since the end of May. This seems to more than price in the government bond spread widening effect, given the anticipation of worsening growth and integration development for Europe, wider fiscal risk and higher cost of funding leading to lower return on equity and capital return.

U.S. Markets:

Stock futures were poised to open higher in New York, ahead of a holiday-shortened workweek filled with jobs data and the Federal Reserve's latest meeting minutes.

Notable earnings this week include reports from MSC Industrial Direct and Simulations Plus on Tuesday and Constellation Brands on Wednesday.

This week's notable economic events include Monday's release of the Manufacturing Purchasing Managers' Index for June, and the Census Bureau will report construction spending data for May.

On Tuesday, the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey is expected to show there were 7.9 million job openings on the last business day of May. That would be roughly 150,000 lower than April's 8.1 million.

Forex:

The euro was higher but its gains might be limited ahead of the second round of French elections on July 7, Swissquote said.

The euro's rally reflects a "buy the rumor, sell the fact" reaction and chatter that the National Rally might not secure an absolute majority, Swissquote added.

However, there's a "non-negligible" risk of this happening which "will unlikely let the euro run too high before more clarity."

The July 4 U.K. general election may have little impact on sterling as the opposition Labour Party is widely expected to secure a majority, ING said.

There's "very little doubt" about a possible Labour landslide win so the election shouldn't be a huge event for markets, ING added.

"We suspect that a stronger-than-expected result by populist/hard-Brexiteer Reform U.K. is the most tangible risk for some slight adverse reacting in sterling assets."

ING said the election result is unlikely to change the Bank of England's policy path and sterling should continue to rely on external drivers.

The dollar's reaction if Donald Trump wins the presidential election is uncertain and depends on whether Trump's wealthy supporters or his Christian nationalist supporters, gain the upper hand Commerzbank said.

The wealthy supporters will want to avoid dramatic upheavals and probably won't be interested in experiments that jeopardize the profitability of capital, Commerzbank said.

"Should they gain the upper hand, a second Trump presidency is likely to be dollar-positive."

The Christian nationalist supporters don't appear to have such inhibitions, Commerzbank said.

Bonds:

French government bond yield spreads will likely reflect the likelihood of it becoming even more difficult to pass budget cuts, implying further increase in France's public debt ratio, Capital Economics said.

Capital Economics' central scenario is that the 10-year [OAT] spread to Bunds will settle around 100 basis points, once any initial volatility around the French election and its aftermath has eased.

Mizuho said the 10-year French government bond yield spread over German peers was narrowing but price action in French bonds will likely be choppy until the next election round.

"While we expect some relief-tightening in OAT-Bund spreads, there is still uncertainty ahead. Our analysis suggests that any significant tightening will be unstable given worrying debt sustainability dynamics."

Energy:

Oil prices rose and expectations for a tighter market continue to pull in speculative money, with the latest trader data showing the net long increased over the last week, ING said.

Drilling activity in the U.S. continues to slow, with the oil rig count falling by six to 479 active rigs, the lowest level since December 2021, ING added.

"We continue to hold a supportive view towards Brent, although there are concerns around demand, such as U.S. gasoline demand and Chinese apparent demand," ING said.

Metals:

Gold futures remained in a narrow range and going forward, the market is looking for data that points to U.S. stagflation, which will be supportive for the metal, MKS PAMP said.

Given that Treasuries have been noticeably sensitive to data, it may not be as quiet a summer as some traders expect on an intraday to short-term basis for gold, MKS PAMP said.

Phillip Nova said gold is likely to remain in an uptrend in the long term.

The precious metal has been hitting "diminishing highs" over the past couple of months, and while the bullish consolidation continues, prices will likely test the immediate resistance around the $2,350-an-ounce level, it said, adding a mild pullback in the dollar will likely support prices of the yellow metal.

EMEA HEADLINES

Far Right Wins First Round of French Parliamentary Elections

PARIS-Marine Le Pen's National Rally notched a victory in the first round of parliamentary elections across France on Sunday, according to projections that showed her far-right party moving one step closer to its goal of winning control of the National Assembly and taking the reins of government.

A projection by polling firm Elabe said National Rally and its allies won 33% of first-round votes while the New Popular Front, a coalition of leftist parties, garnered 29% of ballots. President Emmanuel Macron's pro-business party and its allies were heading for a third-place finish with 22% of the vote, Elabe said.

Atos Strikes Agreement on Financial Rescue Terms

Atos said it reached an agreement with a group of banks and bondholders on the terms of its financial restructuring as the struggling French IT firm seeks to shore up its coffers.

Sunday's agreement comes after rescue talks between Atos and a consortium which included shareholder Onepoint fell apart late last month, which dealt a blow to the embattled company.

GLOBAL NEWS

Rising Government Debt Threatens Financial Stability, Inflation, BIS Says

Governments should cut back on borrowing to ease one of the biggest threats to the stability of the global financial system and support efforts to tame inflation, the Bank for International Settlements said Sunday.

In its annual report on the global economy, the central bank for central banks warned that rising debt levels exposed governments to the risk of a crisis similar to that which roiled the U.K. in 2022, when investors suddenly shied away from government bonds, driving borrowing costs up sharply, weakening the currency and sending equity markets into a tailspin.

China's Manufacturing Sector Stays in Contraction for Second Straight Month

China's manufacturing sector stayed in contraction for a second consecutive month in June, underscoring the difficulties the world's second largest economy faced after Beijing's efforts to resuscitate its property sector.

The manufacturing purchasing managers index remained unchanged at 49.5 in June, extending its contraction streak to a second month in a row, according to data released Sunday by the National Bureau of Statistics.

Top Democrats Urge Party to Stand Behind Biden

WASHINGTON-Top Democratic leaders and donors urged the party on Sunday to stick with President Biden as their nominee, aiming to quell calls for him to step aside as new polling showed voters wary about his ability to lead after a shaky debate performance last week.

The public show of support for Biden on Sunday contrasted sharply with private worries among Democratic lawmakers and activists who remain concerned about the president's ability to defeat former President Donald Trump and his ability to serve at age 81. Just over four months from Election Day, Democrats are acknowledging Biden's difficulties while also struggling to formulate any sort of plausible backup plan.

Biden Tries to Quell Donor Panic at New York Fundraisers

President Biden sought to extinguish anxieties among top Democratic donors Saturday following a disastrous debate performance that raised alarm about his age and ability to remain the party's presumptive nominee, as the White House worked to keep the party fully behind the president.

The task at hand was significant. Some donors who attended events doubted that Biden, 81, could win the election if he stayed on the ticket. One donor who went to a weekend event wanted to tell the president in person that he should step aside and lamented not having the opportunity to do so. The donor described the gathering as a "joyless" event that only fueled more concerns about the president.

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July 01, 2024 05:20 ET (09:20 GMT)

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