Stocks Slip With Euro on French Fiscal Concerns: Markets Wrap

(Bloomberg) — European stocks slipped and the euro weakened as the unexpected result of France’s snap election fueled concern about the country’s worsening finances.

Most Read from Bloomberg

France’s CAC 40 Index underperformed Europe’s benchmark Stoxx 600 gauge following the surprise victory by a left-wing coalition France’s legislative election. European bonds mostly fell, with France’s 10-year yield up about three basis points.

While France’s New Popular Front — which includes the Socialists — came first in the weekend vote, financial market losses were were tempered by news that no party won the majority needed to govern. The outcome potentially constrains the influence of the left-wing coalition and Marine Le Pen’s National Rally, both of which advocate increased public spending.

“Political gridlock beckons at a time when France really needs strong action to target its fiscal position,” said Chris Weston, head of research at Pepperstone Group Ltd. “Markets won’t like a far-left government having a say.” However, the lack of an outright majority for the left means “passing the NFPs manifesto in full will be a real challenge and while uncertainty is high once again, this should contain the fallout,” he said.

Reflecting concerns about rising state expenditure, French government bonds underperformed their German peers. Yet in a sign of jitters waning, the spread between the two has begun to narrow. The gap between 10-year French and German yields, a measure of credit risk, sits at around 70 basis points, below levels seen at the height of the market rout last month.

The New Popular Front — which includes the Socialists and far-left France Unbowed — won 178 seats in the National Assembly, according to data compiled by the Interior Ministry. Marine Le Pen’s National Rally, which pollsters last week had seen winning the election, came third with 143, while President Emmanuel Macron’s centrist alliance notched up 156.

US equity futures retreated after last week’s rally on Wall Street, with Federal Reserve Chair Jerome Powell’s congressional testimony and US inflation data among the main events this week. Traders will be looking to the two to solidify bets policy easing may begin as early as September.

Treasury yields ticked higher and the dollar steadied after last week’s decline.

Earnings from major US banks including JPMorgan Chase & Co. are also due this week. In other corporate news, Boeing Co. agreed to plead guilty to criminal conspiracy to defraud the US after the Justice Department concluded the planemaker failed to adhere to an earlier settlement stemming from two crashes of its 737 Max jetliner.

Meanwhile, President Joe Biden’s continues to salvage his embattled reelection bid, fending off calls from Democratic lawmakers to step aside. Biden registered his best showing yet in a Bloomberg News/Morning Consult tracking poll of battleground states, even as voters offered withering appraisals of his debate performance.

Bitcoin fell with other cryptocurrencies due to concern over possible sales of the token by creditors of the failed Mt. Gox exchange. In China, the central bank sought take more control of market interest rates by announcing additional open market operations and tightening the band within which short-term rates can fluctuate.

In commodities, oil edged lower after four straight weekly gains, even as traders tracked twin threats to crude production posed by a hurricane in the US and wildfires in Canada. Gold was steady, and iron ore extended a decline from a one-month high.

Key events this week include:

Indian Prime Minister Narendra Modi visits Moscow, Monday
Fed Chair Jerome Powell delivers semi-annual testimony to the Senate Banking Committee, Tuesday
US Treasury Secretary Janet Yellen testifies to the House Financial Services Committee, Tuesday
Fed Vice Chair for Supervision Michael Barr, Governor Michelle Bowman speak, Tuesday
China PPI, CPI, Wednesday
Japan PPI, Wednesday
Fed Chair Jerome Powell testifies to the House Financial Services Committee, Wednesday
Chicago Fed President Austan Goolsbee and Fed Governor Michelle Bowman speak, Wednesday
BOE chief economist Huw Pill, BOE policy maker Catherine Mann speak, Wednesday
US CPI, initial jobless claims, Thursday
Atlanta Fed President Raphael Bostic, St. Louis Fed President Alberto Musalem speak
Japan industrial production, Friday
China trade, Friday
US University of Michigan consumer sentiment, PPI, Friday
Citigroup, JPMorgan, Wells Fargo and Bank of New York Mellon report quarterly earnings, Friday