European stock markets experienced a downturn on Friday due to political uncertainty in France, and this cautious mood appeared likely to influence Wall Street as well. Investors were closely watching the U.S. interest rate outlook after a week of mixed signals.
Market Performance
By 12:34 PM GMT, the STOXX 600, a key European stock index, had dropped 0.7%, heading towards its worst week since October last year. France’s CAC 40 index fell by 2.7% on Friday and was down 6.2% for the week, marking its biggest weekly loss in over two years.
Political Uncertainty in France
The political situation in France has contributed significantly to market anxiety. President Emmanuel Macron’s weakened position following the European Parliament elections last weekend led him to call a snap election. This move raised concerns among investors about the potential for the far-right Rassemblement National (RN) party, led by Marine Le Pen, to gain power and implement high-spending policies. France’s finance minister warned of a financial crisis if the far-right wins.
The risk premium on French government bonds surged to its highest level since 2017, with the yield spread between French and German 10-year bonds reaching 81.5 basis points.
Market Reactions
Amelie Derambure, a Senior Multi-Asset Portfolio Manager at Amundi in Paris, noted that political risks are being priced into French assets. However, she pointed out that the current situation differs from 2017 because the RN is not advocating for France to leave the European Union, which significantly changes the risk landscape.
The euro dropped 0.4% to $1.068725, its lowest level in over six weeks, influenced by the political risks in Europe and gains by far-right parties in various countries.
Global Market Trends
World stocks fell by 0.2%, continuing their decline since reaching an all-time high earlier in the week. In the U.S., Wall Street futures were down as investors focused on the outlook for U.S. interest rate cuts. S&P 500 futures fell 0.5%, and Nasdaq futures were down 0.3%.
U.S. Economic Indicators
The U.S. Federal Reserve announced on Wednesday that it would delay the start of rate cuts, with Fed Chair Jerome Powell stating that policymakers would maintain current rates until the economy indicates a need for change. This cautious stance was slightly offset by lower-than-expected producer prices and consumer price data. Weekly jobless claims in the U.S. reached a 10-month high, signaling a cooling labor market.
Amundi’s Derambure suggested that achieving further disinflation might require slower growth and weaker demand, as indicated by recent economic data.
Currency and Bond Markets
The U.S. dollar strengthened, with the dollar index rising 0.2% to 105.53, aiming for a 0.6% weekly increase. The yen fell after the Bank of Japan hinted at future reductions in its bond purchases, although it recovered slightly during European trading.
U.S. Treasury yields decreased, with the 10-year yield dropping by 4 basis points to 4.1996%. In the Eurozone, government bond yields also fell, with Germany’s 10-year yield down by 13.8 basis points to 2.353%.
Commodities
Oil prices eased but remained on track for their best week in over two months. Meanwhile, gold prices rose by 1.4%, reaching $2,334.23.
Summary
Overall, European stock markets are grappling with the effects of political turmoil in France, while global markets and investors remain cautious amid mixed economic signals and geopolitical uncertainties.