Markets Wrap (1H June)
France's election trigger send markets in turmoil
Last week has been pretty dismal for the European markets (STOXX 600 -2,4%), with France taking the lead in the loser front (CAC 40 -6,2%) with snap elections creating chaos. The bond market is also in distress, as the spread between German and French bond yields reached decade highs. France's internal finances are pretty dismal - its debt to GDP ratio is the third worst in EU (111% in 4Q23), only behind the usual suspects Greece and Italy. The current frontrunners to win over the parliament are pushing back on the progress Macron achieved, for example bringing the retirement age back down to 62 from the current 64. The French elections will finalize on the 7th of July, its expected that the New Popular Front (alliance of left leaning parties) or Marine Le Pen's National Rally will gather the most votes.
Further Market expects ECB rate cuts every other meeting
As predicted by everyone, the ECB has made the first rate cut at the start of June. However, now the central bank is giving no help to the markets and is offering little guidance. ECB is once again playing it safe and mainly saying that any rate cuts will be made in the light of the incoming economic and financial data. Markets on their own accord are leaning to the side that the ECB will cut rates up to 2 times in 2024 at alternating meetings. However, this is still rather uncertain, as ECB is not giving guidance and inflation report for May has surprised on the higher side at 2,6%. Furthermore, since the last Markets Wrap issue, we've received 1Q wage indicators that surprised on the upside, as wage growth has been rising at a pace of ~4,7%. It should be noted that delayed Fed rates and turmoil after EP elections have already pushed the euro down and more dovishness from ECB could further weaken the euro.
US economy still has to moderate to receive interest rate cuts
Last week the US has received the first positive inflation report since October, with YoY price rise at 3,3% and no change during May. Lower fuel prices had significant contribution as oil prices and refining margins moderate. Following the inflation report, as expected Fed made no changes to interest rates. The biggest news was the dot-plot change, as the median FOMC member now sees only one interest rate cut this year, down from three cuts expected in March. Investors are a bit more positive, expecting up to two rate cuts. On the strength of the labour markets its a bit murky - one hand, the growth in payrolls was much higher than expected by economists, but the unemployment rate rose to 4%, higher than expected 3,9%.
Turbulence in the European natural gas market
As Europe is reliant on gas imports for its energy needs, it's inevitable that prices will be volatile here. Robust demand for gas and supply disturbances are only making things worse this summer. Furthermore, Europe is competing against stable Asian gas demand as China is importing record amounts of LNG shipments almost every month. Right now gas storage levels are slightly below last year, as rising gas prices are slowing the pace of LNG imports. Furthermore, the predicted above-normal 2024 Atlantic hurricane season can halt crucial LNG shipments from the other side of the Atlantic.
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