Bassanese Bites: A step to the right – July 01 2024
Global markets – week in review
US stocks edged back last week despite a reassuringly benign US inflation report. Buyer exhaustion and concern over the impending French elections likely held back stocks. Overall global stocks edged higher, helped by solid gains in Japan.
The major global highlight last week was Friday’s May US private consumption expenditure (PCE) deflator – the Fed’s preferred inflation measure. The core measure rose 0.1%, in line with market expectations, which allowed annual inflation to ease to 2.6% from 2.8%.
Most notable was that US stocks failed to rally on the result, suggesting the goods news was already well anticipated given benign CPI and PPI May results earlier this month.
Concern over the outcome of the French election at the weekend – with the Far Right poised to do very well – also likely held back investor enthusiasm.
As of Monday morning, the result seems to confirm the worst market fears of a resoundingly large swag of votes to the far right National Rally Party. This sets up the risk of Le Pen’s party securing an outright majority and the Prime Ministership in the second round of voting next Sunday – which would see a return to power sharing ‘cohabitation’ between the diametrically opposed Far Right and centrist President Emmanuel Macron.
Of most concern to markets is what a National Rally hold on power would mean for the stability of the European Union, the war in Ukraine and French fiscal policy. As former UK Prime Minister Liz Truss found out, markets may not take too kindly to big spending promises in the face an an already large budget deficit. The French result could also help boost the prospect of Far Right victories in other European countries.
All up, European financial markets are likely to face increased risk over coming weeks, thwarting hopes for a rotation away from the more expensive US market. As evident last week, Japan may be one beneficiary of the flight from Europe.
Whilst on the subject of politics, the resounding victory of Trump in last week’s US Presidential debate did not appear to affect markets all that much – suggesting Wall Street seems reasonably comfortable with his possible return to power. Of note now is whether Biden continues in the campaign or Democrats seek to parachute in a new candidate at the 11th hour.
Also of some note last week – given the upside inflation surprise in Australia – Canada’s May CPI result was higher-than-expected, suggesting the inflation dragon has yet to be completely slain globally.
