Asia stocks range-bound as EU politics adds new risks

Asian stocks traded within a narrow range on Tuesday as investors weighed the implications of recent political developments in European markets. Right-wing gains in elections and a snap poll in France have raised concerns about the unity of the bloc. The MSCI Asia-Pacific index outside of Japan dipped 0.4% in light trading, while Chinese blue chips were down 0.7%. On the other hand, Japan’s Nikkei rose 0.3% and South Korea stocks gained 0.5%. EuroSTOXX 50 futures also edged up 0.2%, recovering from Monday’s decline, while FTSE futures increased by 0.1%. The euro, French stocks, and government bonds were all impacted as investors assessed the potential impact of right-wing parties on the new European Union executive.
Bond yields in Europe increased as an opinion poll indicated that the far-right National Rally could potentially win the snap election, although without a clear majority. This led to a noticeable widening of the spread between French and German debt.

In other news, the market’s reaction to Apple’s highly anticipated AI strategy was subdued. The strategy involves integrating “Apple Intelligence” technology across a range of applications. After hours trading saw a 0.3% drop in Apple’s shares, following a 1.9% decline during normal trading hours.

During Asian trading, S&P 500 futures and Nasdaq futures both experienced a slight 0.1% decrease, after a modest increase on Monday.

Despite the rise in U.S. yields and the scaling back of expectations for Federal Reserve rate cuts following Friday’s jobs report, the market has displayed remarkable resilience.

JPMorgan analysts stated, “We believe the likelihood of easing this year has diminished and now anticipate the first Fed rate cut to occur in November.”
According to analysts, equities are currently disregarding a number of risks, such as political and geopolitical factors, the concentrated nature of the market, and the increased trading of meme stocks and cryptocurrencies, which may indicate a speculative market. Therefore, they suggest maintaining a defensive approach in the model portfolio.

The futures market implies a 37 basis point reduction in Fed interest rates for this year, down from 50 bps prior to the release of the jobs report.

The Federal Reserve is widely expected to maintain its current policy stance at its upcoming meeting, but the focus will be on whether it continues to project three rate cuts in its future projections.

Goldman Sachs analysts anticipate that the Fed’s projections, known as the “dot plot,” will show two rate cuts in 2024, four cuts in 2025, three cuts in 2026, and a slight increase in the longer-term or neutral rate.

While the preference of the Fed leadership is for a baseline scenario of two rate cuts to maintain flexibility, there is a risk of a scenario with only one rate cut, especially if the core Consumer Price Index (CPI) surprises on the upside in the upcoming release.
According to forecasts, the consumer price index (CPI) is expected to increase by a modest 0.1% in May, with the core CPI rising by 0.3%.

In the currency markets, the euro stabilized around $1.0766 after reaching a one-month low of $1.0733 overnight. It has experienced a decline of approximately 1.1% in the past two sessions due to the impact of the U.S. jobs reports and political uncertainties.

The dollar remained strong at 157.17 yen, just below its peak of 157.715 yen in May.

The weakening of the yen is one of the factors that may lead the Bank of Japan (BoJ) to consider reducing its bond purchases during its policy meeting on Friday, as a preliminary step towards a potential interest rate hike.

Gold prices slightly recovered from their one-month lows, reaching $2,306 per ounce, after being affected by the market’s reassessment of the likelihood of U.S. interest rate cuts.

Oil prices stabilized after a 3% increase on Monday, as several investment banks predicted strong demand for fuel during the summer months and potential purchases of U.S. crude for its petroleum reserves.
Investors are eagerly anticipating the release of the U.S. Energy Information Administration and OPEC’s monthly oil supply and demand data on Tuesday, followed by the International Energy Agency’s report on Wednesday. This information will have a significant impact on market trends. Currently, Brent crude is experiencing a slight decline of 4 cents, settling at $81.59 per barrel, while U.S. crude remains steady at $77.74 per barrel.

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