Rates and politics cast a shadow over markets By Reuters

A look at the day ahead in European and global markets from Rae Wee

Investors in Europe will begin the week mired in uncertainty over the global interest rate outlook and the region’s political landscape.

French President Emmanuel Macron rolled the dice on his political future on Sunday, calling snap legislative elections for later this month after he was trounced in the European Union vote by Marine Le Pen’s far-right party.

His shock announcement came as the European Parliament took a shift to the right after a four-day election that concluded on Sunday, with more eurosceptic nationalists and fewer mainstream liberals and Greens.

MARKET NERVES

Markets took the news negatively and reacted by knocking the euro to a one-month low, while EUROSTOXX 50 equity futures and French bond futures also clocked losses.

While the common currency and euro area assets have been largely cushioned by diminished euro-scepticism compared with elections in the 2010s and early 2020s, the latest developments could serve as a wake-up call.

The focus for investors when broader European markets open later on Monday will likely be Italy’s 10-year government bond yield gap over benchmark German paper – often used as a barometer of risk appetite in the region.

RATES ANGST

In the broader market, traders also continued to reel from the effects of a blowout U.S. jobs report, ahead of the Federal Reserve’s June policy meeting this week.

The rate cut rally which drove world shares higher last week quickly ground to a halt and left Asian stocks struggling on Monday, though trading was thinned with holidays in Australia, China, Hong Kong and Taiwan.

While it’s almost a given that Fed policymakers will dial back on their projections for three rate cuts this year when they announce their rate decision on Wednesday, the question is by how much.

Futures point to about 36 basis points worth of easing priced in for this year, and chances for a pre-election rate cut remains a coin toss.

The Fed aside, the Bank of Japan also meets this week, and expectations are for the central bank to announce a tapering of its massive bond purchases.

That could offer some reprieve for the yen, which was still struggling to strengthen past the 157 per dollar level against a resurgent greenback on Monday.

Key developments that could influence markets on Monday:

– Euro zone Sentix index (June)

– Reopening of 3-month, 6-month and 11-month French government debt auctions

– Reopening of 3-month and 9-month German government debt auctions

(By Rae Wee; Editing by Christopher Cushing)