European stocks, euro extend losses on hazy political horizon

AFP , Tuesday 11 Jun 2024

European stock markets and the euro tumbled further Tuesday as investors faced weeks of political uncertainty after far-right gains in EU Parliament elections that sparked early elections in France.

The New York Stock Exchange
The New York Stock Exchange is shown on Tuesday, June 11, 2024. Wall Street stumbled in premarket trading ahead of a busy week of inflation reports and the Federal Reserve s latest interest rate policy decision. AP


Wall Street also fell at the open as the S&P 500 and the tech-heavy Nasdaq retreated from fresh records set Monday as traders waited for US inflation data and the Federal Reserve's latest monetary policy meeting, both due later Wednesday.

French President Emmanuel Macron's risky gamble of calling new legislative elections, after his centrist party's rout in the EU elections at the weekend, has focussed attention on the country's fragile finances.

The prospect of seeing the far-right National Rally strengthen its hand in parliament, where it is already the largest opposition party, could jeopardize Paris's pledge to rein in massive debt and deficits worsened by the Covid crisis.

"The European Commission will very likely put France into an Excessive Deficit Procedure next week... France's public finances have become less sustainable," said Carsten Brzeski at ING Economics.

"Markets will question whether changes to France's political leadership could lead to more irresponsible fiscal policies and opposition against the European fiscal rules," he wrote in a research note.

Ratings agency Moody's has warned that Macron's move could lower France's credit score because it raises the risk of "political instability".

Investors are "carefully assessing the impact of right-wing parties' success in the European Union and its potential effects on the bloc's unity", said Tickmill Group analyst Patrick Munnelly.

The growing spread between French and German government bond yields, signs of fading confidence in Paris's fiscal prospects, reached its highest level Tuesday since 2020.

The French 10-year yield, its borrowing cost, rose to 3.28 percent compared to 2.64 percent for the German note.

In addition, shares in French broadcasters plummeted as speculation grew that a far-right government could privatise France's state TV group, potentially creating new competition for TF1 (down 7.9 percent) and M6 (down 3.7 percent).

"It would increase competition for advertising in a market that would not be able to absorb the arrival of several new rivals," analysts at Oddo BHF said in Paris.

In the United States, growing expectations that the Fed will not be cutting rates as quickly as hoped this year, with jobs and other data pointing to softening growth but still-high inflation.

While decision-makers are expected to keep borrowing costs on hold at Wednesday's meeting, the inflation numbers could provide clues on when the Fed could start cutting rates.

Speculation has been swirling about how many, if any, interest rate cuts the Fed will introduce this year, with several officials warning they are reluctant to move too soon for fear of restoking inflation, which remains stubbornly above its target of two percent.

Traders started the year predicting as many as six cuts but have whittled them down since then, and now the most optimistic estimate is for three, with some even eyeing zero.

In Asia, investors also took a cautious stance after a tepid start to the week in holiday-thinned trade.

Short link: