Global Market Quick Take: Europe – 1 July 2024

Key points:

• Equities: European equities are set for a strong session in French first-round election result
• Currencies: Euro bounce on French election relief; Yen hits fresh record lows
• Commodities: Corn slumps on ample supply; crude’s price structure signalling tight supply
• Fixed Income: OAT-Bund spread is in focus as markets digest the first round of French voting
• Economic data: US ISM Manufacturing PMI

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

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As we enter Q3 2024, economic growth remains robust, sectors such as defence, AI and obesity drug manufacturing are booming, and asset prices are at an all-time high. But could factors such as unsustainable fiscal spending in the US, geopolitical shocks or gloomy demographic trends destroy our fragile sandcastle economy?

Join SaxoStrats for an Outlook webinar today, Monday 1 July at 11:00 GMT where the team will be discussing the general macro-outlook while focusing on the individual asset classes from equities and bonds to forex and commodities. Note the outlook will be published on 2 July.

In the news: Le Pen’s Far Right Wins First Round, Chases French Majority (Bloomberg), Explainer: Three-way run-offs and horse-trading: what happens next in French elections?  (Reuters), ‘Inside Out 2’ tops $1 billion at the global box office, first film to do so since ‘Barbie’ (CNBC), Boeing to buy Spirit for $4.7 bln in all stock deal- Reuters (Investing), China's June factory activity contracts again, services slows (Investing), Japan's shaky business mood, GDP downgrade cloud BOJ hike timing (Reuters)

Equities: Futures are indicating a strong start to the week in European equities up 1.6% following the first-round results from the French election suggesting Le Pen’s National Rally got less votes than expected with early indications that the party will struggle to get an outright majority. Futures on US equities are also pointing to a higher open. This means that the key focus today will be on French banks and insurance stocks as these have been the worst performers since Macron announced the French parliamentary election.

Macro: US PCE was in-line with expectations. Core PCE rose by 0.1% M/M, easing from 0.3% (revised up from 0.2%), with the Y/Y easing to 2.6% from 2.8%. Headline was flat M/M, down from 0.3% prior, with the Y/Y at 2.6%, down from 2.7%. This is a welcome relief for the Fed and focus turns to non-farm payroll jobs data due at the end of the week. Bank of Japan’s Tankan report showing the sentiment among the country’s biggest manufactures climbed to 13 in June from 11 in March, while the index for larger non-manufacturers edged lower to 33 from 34, which was the highest level since 1991. Japan's real GDP shrank an annualised 2.9% in January-March, down from an earlier estimate of a 1.8% contraction. The government said the downgrade reflected corrections made in past construction orders data. The revisions, which came on top of recent weak consumption and output data, are likely to affect the BOJ's quarterly growth and price forecasts due at its July 30-31 policy meeting. China’s factory activity contracted for a second straight month in June, signaling weakness in an area that Beijing is betting on to drive the economy. The official manufacturing purchasing manager index was unchanged at 49.5 in June, and in line with forecast. A sub-index of new orders at factories inched lower to 49.5 as demand weakened, while a gauge measuring new export orders was unchanged at 48.3.

Macro events (times in GMT): EZ, UK & US Manufacturing Final PMI (June), German Prelim. CPI (June) exp 2.3% vs 2.4%, US ISM Manufacturing PMI (June), exp 49.1 vs 48.7 prior, USDA’s Weekly crop conditions report (2000)

Earnings events: There are no important earnings releases this week.

For all macro, earnings, and dividend events check Saxo’s calendar

Fixed income: Marine Le Pen’s National Rally emerged as the dominant force in the first round of France’s legislative elections, now aiming for an absolute majority. While the OAT-Bund spread might widen today following the weekend's results, it is unlikely to remain high, as much of the negative news has already been factored in, and political risk in Europe is often overestimated (you can find more about this topic here). Despite the U.S. Personal Consumption Expenditures (PCE) data on Friday came as expected, the U.S. yield curve experienced significant bear-steepening, with 2-year yields rising by 2 basis points and 30-year yields increasing by 13 basis points. The primary driver of Treasury performance was the U.S. presidential debate held on Thursday. This week the focus shifts on the U.S. PMI numbers, jobs data and Federal Reserve speeches with Powell speaking on Tuesday and Fed’s William speaking on Wednesday.

Commodities: US corn prices slumped on Friday after USDA reports showed higher-than-expected planting as well as 22% jump in supplies relative to last year, overall reducing the risk of a weather event during the current crop season. Wheat was down 16% in June, its biggest monthly drop in two years as the production outlook in Russia, Europe and SoutAm continued to improve. Gold continues to hold above key support, supported by expectations of rate cuts by major central banks, increased gold demand by key central banks in Asia, and multiple geopolitical hotspots, while copper bulls remain challenged by a current weak demand outlook. Crude oil trades higher near two-month high with the curve structure indicating a tight supply outlook, further supported by geopolitical risks.

FX: The US dollar started the week trading lower after ending last week nearly unchanged. EURUSD has opened the week higher, climbing to 1.0740, with Marine Le Pen’s far-right party’s victory in the first round of the French elections turning out to be less extreme that feared. EURCHF climbed higher to 0.9660, the highest in over two weeks, as safe-haven Swiss franc declined. AUDUSD has been a stand-out performer last week and is trading above 0.6650. GBPUSD remains in focus this week with UK elections the next key political event to watch. The JPY meanwhile remains under pressure, trading above 161 against the dollar while hitting a fresh record low against several currencies, including the euro at 173.25 and Aussie at 107.49.

Volatility: The VIX finished Friday at $12.44 (+0.20 | +1.63%). The SKEW index, which measures the perceived risk of outlier moves in the S&P 500, dropped to 141.79 (-1.27 | -0.89%), retreating from its highs of the previous weeks. This week brings several key economic releases that will impact market volatility. Options pricing suggests the following expected moves: the S&P 500 at plus or minus 54.75 points (+/- 1.00%), the Nasdaq 100 at plus or minus 268.31 points (+/- 1.36%), the DAX at plus or minus 245.46 points (+/- 1.35%), and the CAC 40 (PXA) at plus or minus 212.97 points (+/- 2.85%), influenced by the ongoing French elections. VIX futures are currently at $13.900 (-0.125 | -0.88%). S&P 500 and Nasdaq 100 futures started their first nightly session of the week positively: S&P 500 futures are at 5534.25 (+12.75 | +0.23%) and Nasdaq 100 futures are at 19988.00 (+55.75 | +0.28%). Friday's top 10 most traded stock options included Nvidia, Tesla, Amazon, Apple, Nike, Advanced Micro Devices, Micron Technology, GameStop, Rivian Automotive, and Super Micro Computer.