The week started on a positive note but the positive vibes will likely leave their place to the chatter of scenarios regarding how the French will prevent Marine Le Pen from gaining a majority in the parliament in the second round of the legislative election this weekend. Will the opposition parties form a sufficiently convincing alliance to prevent National Rally from gaining an outright majority, or will Marine Le Pen’s National Rally amass the majority despite all efforts? Both scenarios mean some political uncertainty for France and beyond its borders, but investors’ hearts are pounding toward the first option: a hung government – which would at least prevent Le Pen from exploding the national debt and jeopardize/reverse Macron’s efforts to pull the national debt back to levels acceptable by EU rules. The latter would help tame the spread between the French and the German bonds – which already retreated below 80pb on Monday on hope and pricing that Le Pen won’t secure a parliamentary majority, and support euro. The EURUSD rallied to 1.0776 yesterday, flirted with its 50-DMA but retreated to around 1.0730 this morning. The CAC 40 opened the week with a bang, gained as much as 2.7% before paring losses and closing just 1% up. The European futures are in the negative this morning.
On the data front, European Central Bank (ECB) Chief Lagarde warned that the bank doesn’t have enough evidence that inflation threat is over, hinting that the ECB will probably bypass a second rate cut when it meets later this month. Inflation numbers revealed by major Eurozone countries since Friday are mixed: as expected in France, a bit higher than expected in Spain and a bit lower than expected in Italy and Germany. So far, the actual CPI numbers didn’t deviate much from expectations – clearly not enough to deviate the attention from the French election jitters. The aggregate inflation figure for early June is due today, both headline and core inflation are expected to have eased slightly in June. If that’s the case, we could see the ECB doves breathe a sigh of relief, if not, the euro could see a minor support but in both cases, the euro will remain under the pressure of French political uncertainties throughout the week, and any rally attempts could limited into the second election weekend in France.
In the US, data released yesterday posted softer-than-expected ISM manufacturing numbers in June and a decline in construction spending in May. Atlanta Fed’s GDP Now plunged to 1.7%. All that softness could’ve pulled the US yields lower but the political news – there – interfere with the market pricing as well. According to the latest, the Supreme Court said that Donald Trump will benefit from some immunity from criminal charges for trying to reverse the 2020 election, making him a step closer to winning this year’s presidential election after last week’s worrying debate for Joe Biden. The Trump win expectation makes US curve steeping an active bet according to Morgan Stanley analysts who say that Trump in the White House will slow growth and boost inflation – with increased trade tensions and more tariffs.
In the FX, the US dollar index fell yesterday on a kneejerk jump in the euro but is upbeat this morning. The USDJPY continues its hike above the 161.50 level, preparing to test the 162 with limited upside potential given the direct FX intervention threat. The franc is giving back the safe haven gains of late. The euro-franc is back above the 100-DMA while the USDCHF takes over the 50-DMA offers. The Swiss National Bank’s (SNB) dovish stance should keep the franc on a softening path, apart from periods of sudden appreciation due to safe haven flows.
In equities, the S&P500 consolidated gains near record on Monday, s Tesla jumped more than 6% to above its 200-DMA ahead of quarterly deliveries report that’s due today, and that could confirm a second quarter decline in deliveries. The Chinese rival BYD on the other hand is down in Hong Kong after announcing to have sold 1 million cars in Q2 – around 426K of them being purely electric.
In energy, crude oil started the week strong ahead of the July 4th holiday in the US, which AAA predicts will see a record number of drivers, and Hurricane Beryl, which is not expected to impact operations in the Gulf of Mexico immediately but could cause disruptions later in the week. US crude rallied 2.4% and hit the $84pb mark for the first time since April. Risks remain tilted to the upside, the next target for the bulls stands at $85pb level, where we should see support and rebound given that the soft manufacturing data from the US and China at the start of the week don’t give a further support.
Elsewhere, Cable remains under pressure ahead of Thursday’s general election while the FTSE 100 couldn’t really benefit from a softer sterling and a rapid rise in oil prices yesterday and closed the session near flat. The election uncertainty seemingly keeps the bulls on the sidelines even though a Labour win is seen as a net positive for the British stocks. The price pullbacks in the FTSE 100 are likely interesting opportunities to strengthen long positions in energy-heavy British stocks that should fully benefit from reflation trades once the election is behind. Zooming out, the FTSE 100 didn’t do bad at all over the past few quarters. The index posted a fourth quarter gain in the Q2, has hit a record high in May and remains upbeat as we enter the second half on expectation of more political stability, an upcoming Bank of England (BoE) rate cut and improved reflation flows.
