European Midday Briefing : Investors Await U.S. Jobs Data, French Election

MARKET WRAPS

Stocks:

European stocks rose on Friday as the U.K. put its general election behind it and investors looked ahead to U.S. jobs data and the second round of French parliamentary elections this weekend.

Markets weren't hugely interested in the U.K. election, but policy choices over the next few years will be critical with investors likely to face further bouts of inflation, Royal London Asset Management said.

"In contrast to the situation in France, the outcome of the snap election in Britain was never really in doubt and macroeconomic policy differences between the main parties are, on the surface, minor."

The U.S. labor market statistics is due at 12:30 GMT. "The hope ahead of today's U.S. data is that the labor market report shows a slowdown in new jobs and wages and provides support for inflation being tamed without the economy slowing down too much," SEB said.

Stocks to Watch:

U.K. house builders led the FTSE higher this morning. RBC Capital Markets said Taylor Wimpey, Persimmon and Vistry Group are expected to be the biggest winners from the Labour party victory. The party's pledge to reinstate housing supply targets, refine greenbelt and reform of planning will boost the sector, making re-ratings more likely.

ASML could potentially report more than EUR5 billion in orders for the second quarter, ahead of consensus expectations of EUR4.6 billion, according to UBS.

Economic Insight

The new government in Britain's room for maneuver is likely to be severely limited by the country's difficult fiscal situation, Commerzbank said.

"The scope for fiscal policy may be even smaller than the current plans indicate, as growth assumptions have often proved to be too optimistic in recent years."

T. Rowe Price said the new administration might move quickly to raise the minimum wage and link it to the cost of living--a campaign promise by Labour--stressing it needs to act cautiously or risks aggravating inflationary pressures.

"Otherwise, interest rates may need to stay higher for longer," he says.

U.S. Markets:

Stock futures rose as traders looked ahead to the nonfarm payrolls report to gauge whether weakening economic growth could give the Fed room to lower rates as soon as September.

Economists forecast that 200,000 jobs were added in June and that the unemployment rate held at 4%.

Forex:

EUR/USD's surge beyond the 1.0800 level seems built on relief that the National Rally's victory in the French elections' first round won't translate into an outright majority during the second round, Mizuho Bank said.

However, relief-linked EUR gains could be difficult to extend, given dire industrial data out of Germany, it added.

The dollar fell to a three-week low ahead of payrolls data. A weaker-than-expected set of data would fuel rate-cut bets and weigh on the dollar, while a positive surprise would prompt a scaling back of rate-cut expectations, which have been rising recently after soft data and Fed comments, Swissquote Bank said.

Stirling could gain on the prospect of improving economic conditions and political stability in the U.K. MUFG Bank said.

Labour's large majority could bring a "positive political stability growth premium" for the economy at a time when growth is beginning to accelerate as the energy price shock fades and positive real income growth returns.

It expects sterling to rise to 1.2980 against the dollar and the euro to fall to 0.8400 by the fourth quarter.

Bonds:

Positive investor sentiment toward longer duration at the latest French government bond auction indicates that investors don't anticipate the far-right National Rally party securing an absolute majority in the second round of elections on Sunday, Saxo said.

"Consequently, the OAT-Bund spread could tighten further, potentially reverting to 50 basis points."

Morgan Stanley Research said a range between 60 basis points and 80 basis points remained most likely for the 10-year French OAT-German Bund yield spread, with a potential compression toward 60bps if there is a no-majority outcome in the second round of French elections on Sunday.

It anticipated the market retaining a small short bias in OATs, and likes fading the OAT-Bund spread widening via a 50:50 Netherlands/Austria basket versus Germany.

Citi Research said medium-term uncertainty looks here to stay, adding to risk premium in OAT spreads. Its updated scenarios for the second round of French elections on Sunday show scope for limited spread tightening between French and German government bond yields on a potentially gridlocked parliament.

"However, any tightening in OAT-Bund should be faded barring a centrist majority, especially past 60 basis points."

Generali Investments recommends overweighting fundamentally sound countries, for example Portugal and Ireland. In the context of the French presidential election, the market is concerned over the next government's measures aimed at reducing France's budget deficit, while Italy also has a comparably high deficit.

The U.S. 10-year Treasury yield is poised to move in the 4.137%-4.622% range in the near term, based on the weekly chart, UOB Global Economics & Markets Research said.

German Bund and U.S. Treasury yields are expected to fall moderately in the months to come as slowly receding inflation should enable both the ECB and the Fed to cut key interest rates by 25 basis points in the third quarter, Generali Investments said.

"However, a strong downward movement is unlikely."

Energy:

Oil was on track for weekly gains on signs of strong demand over the summer and hopes that the U.S. central bank will cut interest rates soon.

According to ANZ, sentiment this week was also supported by strong mobility indicators and U.S. inventory data in line with a tightening market balance, as well as intensifying geopolitical tensions in the Middle East.

Meanwhile, Saudi Arabia cut the price of all crude grades it sells to Asia, underlining the pressure that OPEC producers face amid robust non-OPEC supply growth.

Metals:

Gold futures gained and if U.S. data fails to impress the market, we would expect significant moves in the dollar index to the downside which means gold price could potentially move higher, Zaye Capital Markets said.

Copper also rose and BMI maintained its view that "the decline in U.S. dollar strength in the second half of 2024 will add support to base metal prices, however, a later Fed cut could limit upside."

EMEA HEADLINES

Shell to Take Up to $2 Billion Impairment Hit, Expects Weaker Gas Trading

Shell expects to book up to $2 billion in post-tax impairments after delaying construction of a major biofuels plant as European energy majors grapple with weak market conditions, while trading in its core gas division is set to fall.

The British energy giant said Friday that it expects to book an impairment after tax of between $1.5 billion and $2 billion mainly due to pausing construction of its biofuels facility in Rotterdam, as well as the divestment of its chemicals refinery in Singapore.

German Industry Continues to Struggle

German industrial production slumped in May as car manufacturing tailed off, after an uptick in the sector at the start of this year faded away.

Industrial output declined 2.5% on month in May, on a seasonally and calendar-adjusted basis, much weaker than the 0.1% increase in April, German statistics agency Destatis said Friday. Economists expected a much smaller 0.2% decline, according to a The Wall Street Journal poll.

Canada Approves Glencore-Led Deal for Teck Coal Assets

OTTAWA-Canada approved a Glencore-led $9 billion deal to acquire coal assets from Teck Resources late Thursday, after officials secured commitments from both companies about additional investment in the country.

Meanwhile, Canada's industry minister, François-Philippe Champagne, said pending approvals of foreign-led deals involving critical minerals would only be granted in "the most exceptional of circumstances."

GLOBAL NEWS

China's Central Bank Borrows 'Hundreds of Billions' of Yuan in Government Bonds

China's central bank has signed agreements with major brokers to borrow "hundreds of billions" of yuan worth of government bonds, a move analysts say is likely aimed at stabilizing plummeting long-term bond yields.

The People's Bank of China has started to borrow medium and long-term notes from lenders, state media said Friday, now holds "hundreds of billions" of yuan worth of bonds.

Bitcoin Crashes Below $55,000. Why the Crypto Can Plunge Further.

Bitcoin and other cryptocurrencies were diving early Friday as the market took fright at the pending refund of assets from the collapsed Mt. Gox crypto exchange.

Bitcoin was down 8.6% over the past 24 hours to $53,927. Mt. Gox transferred 47,228 Bitcoin, worth more than $2.5 billion to a new wallet, according to blockchain analytics firm Arkham Intelligence. Mt. Gox's trustee has said it would begin making repayments to creditors this month.

Is the big slowdown in hiring finally here? June U.S. jobs report not supposed to show it.

The U.S. economy wasn't supposed to churn out so many new jobs this year, according to the experts. But lots of businesses have been hiring to underpin a solid economic expansion.

Is the dam finally about to break? Here's what to watch for in the June U.S. jobs report due Friday morning.

Biden Presses Netanyahu to Close Cease-Fire Deal After Talks Show Progress

An embattled President Biden pressed Prime Minister Benjamin Netanyahu to hammer out a Gaza cease-fire deal, telling the Israeli leader in a phone call on Thursday that now is the time to save the lives of hostages held by Hamas.

Biden talked through with Netanyahu a draft agreement that reflects significant changes from the Hamas side that boost the chances of a deal, according to a senior Biden administration official.

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