Key Insights
- Political shifts in France and the UK are impacting markets, with potential haven flows into UK assets due to French uncertainty.
- US inflation data and labor market indicators are crucial for Fed rate cut expectations, potentially driving stock market gains.
- Q2 earnings season kick-off, particularly in the banking sector, could provide further momentum to equity markets.
How Will French Political Uncertainty Impact European Markets?
As we kick off the new week, financial markets are grappling with significant political developments, particularly in Europe.
The unexpected outcome of the French election, which saw the left-wing New Popular Alliance secure the largest share of votes, has thrown the country’s political landscape into disarray. This result has led to a hung parliament, potentially ushering in a prolonged period of coalition negotiations.
Consequently, we’re seeing mild pressure on the euro, with EUR/USD hovering just above the 1.0800 mark, while CAC 40 futures indicate a modest 0.3% decline at the open.
Will UK Assets Benefit from Political Stability?
In contrast, the UK’s political scene has gained clarity with Labour’s decisive victory. This stark difference between French uncertainty and British stability could potentially trigger some haven flows into UK equities and bonds.
However, with these major political events now behind us, market focus is likely to shift towards key economic indicators, the commencement of Q2 earnings season in the US, and mounting expectations for interest rate cuts.
Can Softening US Inflation Data Fuel Rate Cut Expectations?
A critical data point on the horizon is the US Consumer Price Index (CPI) for June. Analysts anticipate a decline to 3.1% annually, down from May’s 3.3%.
Should this projection materialize, it would mark the lowest inflation reading since January, further reinforcing the deflationary trend that’s fueling expectations of a Federal Reserve rate cut in September. Currently, the market is pricing in a 75% probability of such a move, up from 60% just a week ago.
Is the US Labor Market Showing Signs of Weakness?
Adding to the economic narrative, the US unemployment rate ticked up to 4.1% last month, reaching its highest level since 2021. Some analysts are now projecting it could hit 4.5% by year-end.
Coupled with rising initial and continuing jobless claims, these indicators suggest a softening US labor market. If paired with weaker-than-expected inflation data this week, we could be looking at a scenario of economic slowdown, albeit not an outright contraction.
Are US Equities Poised for Further Gains?
Indeed, US equities have already been showing strength, with both the S&P 500 and Nasdaq closing at record highs last week. Notable performers included Tesla, which surged over 27%, buoyed by strong Q2 delivery figures and growing interest in its AI potential ahead of its upcoming Investor Day.
What’s the Outlook for UK Economic Growth?
Turning to the UK, all eyes will be on the monthly GDP release for May, expected to show a 0.2% monthly increase. The new Starmer government’s pledge to boost economic productivity adds an interesting dimension to this data point. The FTSE 250, a more domestically-focused index, outperformed the FTSE 100 last week, suggesting a positive market reaction to the change in government.
How Are Commodities Responding to Economic Signals?
In the commodities space, we saw broad-based gains last week. Oil prices firmed up, with both WTI and Brent comfortably above $80 per barrel as we enter the peak summer driving season. Industrial metals also rallied, with copper up 3.5% and iron ore gaining over 5%. Gold, too, made significant strides, rising 2.8% to $2,392 per ounce, now sitting just $35 shy of its record high.
Lastly, as we enter Q2 earnings season, the banking sector will be in focus. JP Morgan and Citi are expected to post strong results, driven by a resurgence in dealmaking activities. If these projections materialize, we could see the S&P 500 banking index challenge its January 2022 high.
