Euro Gains on Le Pen Bets, China Eyed After PMI: Markets Wrap

(Bloomberg) — The euro strengthened on signs Marine Le Pen’s far-right party is unable to govern outright following the first round of France’s legislative elections. Asian stocks will be in focus amid further signs China’s economy is struggling.

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The European currency rose in early Asian trading as the market had been concerned that a very strong showing for Le Pen’s National Rally will increase the odds of expansive fiscal policy, further muddying the outlook for the euro. Initial election results showed Le Pen’s party won with a smaller margin than some polls had indicated with opponents already strategizing how to keep the far-right party out of power.

“A scenario where NR could rule on its own now looks less likely,” which lifted the euro as concerns on fiscal largess eased, said Rodrigo Catril, a strategist at National Australia Bank in Sydney. “We now need to wait and see how the second round shapes up and if other parties can cobble a united opposition to RN.”

Equity futures in Asia pointed to a mixed start, with contracts in Australia and Hong Kong slipping while those in Japan rose. Investors will now be keeping a keen eye on Chinese stocks after factory activity contracted for a second straight month in June. The private Caixin China manufacturing PMI release is also scheduled later Monday.

The staid start comes as concerns linger on whether Asia’s stock rally can persist. While the MSCI Asia Pacific index rose 2.1% last quarter, its third straight quarterly gain, a souring Chinese economy saw the nation’s stocks enter a technical correction last week, while investors are concerned that the pace of Japan’s stock market rally may slow in the second half of the year.

Elsewhere in Asia, South Korean currency traders will be on tenterhooks amid fears of a lift in volatility as the won’s new trading hours come into effect. Japanese bonds will also be in focus with the release of the Tankan surveys.

US stock futures edged higher in early trading after the S&P 500 fell 0.4% on Friday, while US Treasuries slumped amid concerns over the upcoming US election after President Joe Biden’s poor performance in the first debate. Key Democrats rallied behind Biden’s re-election bid at the weekend even as questions mount over his capacity to lead, with some urging the president to consider stepping aside. Australian bonds followed Treasuries lower.

As the quarter ended in the US on Friday, a swath of data indicated the world’s biggest economy is cooling without lasting damage to consumers. US consumer sentiment declined by less than initially estimated on expectations inflationary pressures will moderate and the Fed’s preferred inflation gauge marked its smallest advance in six months.

With former president Donald Trump appearing more likely to unseat Biden in the November election, the market should “be pricing in a considerable risk of higher-than-target inflation in the coming years, and this is from a starting point of our thinking they already offered structural value,” Barclays strategists Michael Pond and Jonathan Hill said in a note.

Traders will shift attention to European assets later Monday amid movements by Le Pen’s opposition to form alliances to block her right-wing party from gaining power at the second round of voting. Of interest will be bond markets after the extra yield investors demand to hold 10-year French notes over safer German debt rocketed to more than 80 basis points prior to the vote, levels last seen during the euro area’s sovereign debt crisis.

“If they start to look credible, then we could see French markets recover,” said Kathleen Brooks, research director at XTB Ltd. “If fears about a hard right government start to recede, we should see it in the French–German yield spread first.”

In corporate news, Boeing Co.’s shares will be front of mind when US markets open after it agreed on Sunday to purchase Spirit AeroSystems Holdings Inc. in an all-stock deal that values the company at $4.7 billion, according to people with knowledge of the transaction. Still, the US Justice Department will charge the company with criminal fraud, leaving the planemaker to choose between pleading guilty or taking the risk of going to trial.

In commodities, oil settled little changed after retreating from a nearly two-month high late last week. Gold edged lower after it wavered on Friday as traders digested the US inflation data.

Elsewhere this week, the US jobs report and inflation readings in Europe, Indonesia, South Korea and Thailand are due, while the UK is set to vote in its general election. A swath of central bankers are scheduled to speak, including Fed Chair Jerome Powell and ECB President Christine Lagarde.

Key events this week:

Australia retail sales, Monday
Japan Tankan report, Monday
China Caixin manufacturing PMI, Monday
Eurozone S&P Global Eurozone Manufacturing PMI, Monday
Indonesia CPI, Monday
India HSBC Manufacturing PMI, Monday
UK S&P Global / CIPS UK Manufacturing PMI, Monday
US construction spending, ISM Manufacturing, Monday
ECB President Christine Lagarde speaks, Monday
Bundesbank President Joachim Nagel speaks, Monday
RBA issues minutes of June policy meeting, Tuesday
South Korea CPI, Tuesday
Eurozone CPI, unemployment, Tuesday
Fed Chair Jerome Powell speaks, Tuesday
ECB President Christine Lagarde speaks, Tuesday
China Caixin services PMI, Wednesday
Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday
Poland rate decision, Wednesdsay
US FOMC minutes, ISM Services, factory orders, trade, initial jobless claims, durable goods, Wednesday
ECB President Christine Lagarde speaks, Wednesday
New York Fed President John Williams speaks, Wednesday
Sweden’s Riksbank issues minutes of June meeting, Wednesday
Australia trade, Thursday
Brazil trade, Thursday
UK general election, Thursday
European Union provisional tariffs on China EVs set to be introduced, Thursday
ECB publishes account of June’s policy meeting, Thursday
US Independence Day holiday, Thursday
Philippines CPI, Friday
Taiwan CPI, Friday
Thailand CPI, international reserves, Friday
Eurozone retail sales, Friday
France trade, industrial production, Friday
Germany industrial production, Friday
ECB President Christine Lagarde speaks, Friday
Canada unemployment, Friday
US unemployment, nonfarm payrolls, Friday
New York Fed President John Williams speaks, Frida