The euro experienced a significant decline and stock and bond futures slipped on Monday, following French President Emmanuel Macron's surprise announcement of a snap election. This decision came after a significant defeat in the European Union elections at the hands of the far-right National Rally party, led by Marine Le Pen.
In early Asian trading, the euro fell by 0.3%, hitting a one-month low of $1.0764 and a 21-month low against the British pound at 84.60 pence. EuroSTOXX 50 equity futures dipped by 0.4%, while French bond futures continued their downward trend from late last week. Investors are now closely watching the yield gap between Italy's 10-year government bonds and benchmark German bonds, a key indicator of risk appetite in the region.
The European Parliament elections saw centre, liberal, and socialist parties retaining a majority. However, eurosceptic nationalists made the largest gains, raising concerns about the major powers' ability to drive policy within the bloc. In a bold move to reassert his authority, Macron has called for a parliamentary election, with the first round scheduled for June 30. Should the far-right National Rally secure a majority, Macron would lose significant control over domestic affairs.
"This is probably somewhat bad news for markets," said Holger Schmieding, chief economist at Berenberg. "It introduces an unexpected element of uncertainty." The election announcement comes at a time of heightened political activity, with Britain holding a general election on July 4 and crucial U.S. elections scheduled for November. Market fragility has been exacerbated by diminishing expectations of U.S. rate cuts.
Mansoor Mohi-Uddin, chief economist at the Bank of Singapore, suggested that the prospect of a far-right victory in France's snap elections might keep the euro under pressure in the near term. However, he emphasized that U.S. economic data and policy would remain the primary drivers.
While the euro and euro area assets have been relatively stable compared to previous elections, the unexpected response from France could serve as a wake-up call. Europe's broad STOXX 600 share index, which has been trading near record highs, and the spread between German and Italian 10-year bond yields, could also face vulnerability. "Obviously, the snap election is a new source of uncertainty, which should have some negative impact on economic and market confidence, at least in France," noted Jan von Gerich, chief market analyst at Nordea.
Peter Cardillo, chief market economist at Spartan Capital Securities, remarked that a significant surge to the far-right would be necessary for the euro to weaken substantially. The European Central Bank recently delivered its first rate cut in five years, contributing to a nearly 2.5% decline in the euro against the dollar this year.
In France, growing concerns about the country's high debt levels could also come into focus amid renewed political uncertainty. Standard & Poor's recently downgraded France's sovereign debt rating, criticizing the government's handling of the strained budget just days before the EU election.
Asian Markets React
The South Korean won and the Malaysian ringgit slipped in Asian trading, with MSCI's Asia-Pacific stock index slightly lower. Japan's Topix rose following data showing the country's economy contracted less than initially estimated. Markets in China, Hong Kong, Taiwan, and Australia were closed for holidays.
The yield on 10-year Treasuries rose for the third consecutive day, driven by the strong U.S. jobs report, which tempered expectations of Federal Reserve interest rate cuts and alleviated concerns about an economic slowdown. "We're still expecting a soft landing in the States - as long as that's a scenario, I think Asian markets have upside potential," said Lorraine Tan, director of Asia equity research at Morningstar Inc.
Investors are awaiting more insights into the Federal Reserve's monetary policy when U.S. policymakers update their interest rate forecasts. The Bank of Japan's next announcement is scheduled for Friday, with expectations for steady policy.
Oil prices steadied after a weekly decline, as markets digested OPEC+'s decision to restore supply. Additionally, Israeli political developments saw Benny Gantz resign from Israel's emergency government, potentially leaving Prime Minister Benjamin Netanyahu more dependent on right-wing coalition partners.
