Asian markets subdued as US rate outlook weighs, Euro rises after French elections

Asian stocks trade sideways: Asian stocks were muted on Monday as traders weighed the outlook for US interest rates, while the euro rose following the first-round results of France's unexpected snap election, which saw the far-right secure a win, albeit with a smaller share than some polls had anticipated.

The surprising election result has unsettled markets, with both the far-right and the left-wing alliance, which came second on Sunday, pledging major spending increases. This comes at a time when France's high budget deficit has led the EU to recommend disciplinary measures.

On Monday, the euro gained 0.32 per cent, European stock futures rose 1 per cent, and French OAT bond futures increased by 0.15 per cent as investors processed the less alarming results, though uncertainty remains.

Exit polls indicated Marine Le Pen's National Rally (RN) winning around 34 per cent of the vote, comfortably ahead of leftist and centrist rivals. However, the RN's chances of winning power next week will depend on the political manoeuvring of its rivals in the coming days.

"Perhaps the result isn't as bad as the market had feared," said Michael Brown, senior strategist at Pepperstone. "We've also seen a lot of rhetoric from other parties looking to perhaps pull out candidates to try and avoid the National Rally winning seats in the runoff next Sunday ... The market may be taking a little bit of solace in that."

The focus now shifts to next Sunday's runoff, depending on how parties decide to join forces in each of the country's 577 constituencies for the second round, which could still result in a majority for RN.

"Investors are concerned that if the far-right National Rally party wins a majority in the French Parliament, this could set the stage for France to clash with the EU, which could disrupt Europe’s markets and the euro sharply," said Vasu Menon, managing director of investment strategy at OCBC.

In Asia, the MSCI's broadest index of Asia-Pacific shares outside Japan was 0.07 per cent higher, kicking off the second half of the year with a 7 per cent rise so far in 2024. Japan's Nikkei rose 0.57 per cent. China stocks fell, with blue-chips down 0.45 per cent, while Hong Kong's Hang Seng Index remained flat.

A private sector survey on Monday showed China's manufacturing activity grew at the fastest pace in over three years due to production gains, despite slowing demand growth. The Caixin/S&P Global manufacturing PMI data contrasted with an official PMI released on Sunday, which indicated a decline in manufacturing activity.

Attention remains on the Federal Reserve and its rate-cut timeline, following data on Friday showing US monthly inflation was unchanged in May. The PCE price index increased 2.6 per cent in the 12 months through May, slightly down from 2.7 per cent in April, remaining above the Fed's 2 per cent inflation target. Markets are still expecting at least two rate cuts from the Fed this year, with a September cut having a 63 per cent probability, according to the CME FedWatch tool.

US stocks ended lower on Friday after an early rally faded. The yen traded around 160.98 per dollar after the Japanese government revised GDP data, showing the economy shrank more than initially reported in the first quarter. Data also indicated that Japan's factory activity remained unchanged in June, struggling with rising costs due to the weak yen. The yen hit 161.27 on Friday, its weakest level since late 1986, with traders looking for signs of intervention from Japanese authorities.

The euro reached a two-week high of $1.076175 in early Asian trading, pushing the dollar index slightly lower to 105.59. In commodities, oil prices edged higher, with Brent futures up 0.39 per cent at $85.33 per barrel and US West Texas Intermediate crude futures rising 0.42 per cent to $81.88.

(With Reuters inputs)