Asian stocks rose slightly on Monday, as investors grew confident in a September interest rate cut by the United States. Meanwhile, the euro is in trouble due to the hung parliament shown in the French election.
In France, the headline of the news was the unexpected victory of the left-wing alliance over the far-right. This major setback made Marine Le Pen's National Rally (RN) unable to govern. The failure of the far-right provides a little comfort for investors, but they are also concerned that the left-wing plan may cancel many of President Emmanuel Macron's market-oriented reforms.
Holger Schmiedling, Chief Economist of Berenberg, said: "Forming a government in France will be very difficult, and the most likely result is some arrangement between the left and Macron. This may mean a reversal of some reforms instead of further reforms. I think the result is much better than the worst case scenario, but it is still not the best."
The euro fell slightly to $1.0828 after hitting a high of $1.0843 on Friday when the weak employment report weakened the US dollar. The euro fell 0.25% against the Swiss franc to 0.9680, but remained strong against the yen at 174.00 yen. The US dollar against the yen traded near 160.70, slightly lower than the recent high of 161.86 yen.
European stocks opened with the French CAC 40 index down 0.6% due to a hung parliament after the French election, putting pressure on the economic outlook. The German DAX index rose 0.1%, the UK FTSE 100 index fell 0.39%, and the European STOXX 50 index fell 0.2%. French 10-year bond futures fell 23 basis points, down 0.21%.
Supported by expectations of loose US policy, the stock market performed well. The MSCI Asia-Pacific (excluding Japan)'s widest stock index rose 0.1%, reaching the highest point in two years last week.
S&P 500 futures and Nasdaq futures were almost unchanged. Later this week, Citigroup, JPMorgan and Wells Fargo will release their financial reports, marking the beginning of the earnings season.
Investors believe that the non-farm payrolls report released last Friday increased the possibility of a rate cut by the Fed in September. Currently, the futures market shows a 77% chance of interest rate cuts.
"It is mainly a downward revision of 111,000, and three-month employment growth has dropped sharply to +177,000, previously reported as +249,000," a Goldman Sachs analyst wrote. "We continue to expect the Fed to cut interest rates for the first time in September, followed by cuts every quarter, eventually reaching a terminal rate of 3.25% to 3.5%."
After the report was released, US Treasury yields fell, with 10-year Treasury yields falling to 4.30%, down from a high of 4.4930% earlier last week. Federal Reserve Chairman Jerome Powell will deliver remarks to Congress on Tuesday and Wednesday, offering his outlook, while several Fed officials will also speak this week.
The main economic event this week will be the release of the US Consumer Price Index (CPI) report on Thursday, with overall inflation expected to slow down from 3.3% to 3.1%, and core inflation expected to remain at 3.4%.
In the commodity market, gold remained near a one-month high of $2385. Oil prices fell as the market waited for Hurricane Berill's possible impact on Gulf of Mexico supply. Brent crude fell 14 cents to $86.40 per barrel, and US crude fell 29 cents to $82.87 per barrel.