The week in review: Macron causes European equity rout

The story of the week was Emanuel Macron calling for a snap election in France. This sent European stock stumbling.

London stocks were still in the red by the close on Friday, mirroring a broader European sell off driven by the political uncertainty in France.

The FTSE 100 index fell by 0.21% to 8,146.86, while the FTSE 250 dropped 0.37% to 20,120.36.

In currency markets, sterling fell 0.63% on the dollar to trade at $1.2687, as well as dropping 0.29% against the euro trading at €1.1853.

Market analysts highlighted concerns over the upcoming first round of voting in the French parliamentary election.

Marine Le Pen’s party is expected to secure the most votes, but an outright majority remains uncertain.

The prospect of a significant gain for Le Pen’s hard-right party is causing jitters among investors, particularly affecting French stocks and banks.

Fund outflows out of Europe into emerging markets and US mega stocks have contributed to the S&P 500and Nasdaq 100 hitting fresh highs this week while the French CAC 40 led the falls dropping by around 6%.

The pan-European STOXX Europe 600 Index fell 2.39% and none of the major European bourses avoided the fallout. Italy’s FTSE MIB fell 5.76% and Germany’s DAX dropped 2.99%,

‍

In the US

‍

In the US the major indexes ended mostly higher for the week, with the S&P 500 Index and Nasdaq Composite touching new highs. The market’s advance remained exceptionally narrow for the second consecutive week, however, with an equally weighted version of the S&P 500 trailing the capitalisation-weighted counterpart by 2.15%.

Enthusiasm over the potential of artificial intelligence appeared to provide a continuing tailwind to technology-related stocks and growth shares, which outpaced value stocks by the largest margin since March 2023 (461 basis points), according to Russell Indexes.

The week was also notable for the shareholder approval of Tesla CEO Elon Musk’s roughly $48 billion pay package (in the form of Tesla stock), which may have partly reflected enthusiasm over his push for autonomous driving vehicles.

On Wednesday stocks were given another boost as the Labour Department reported that headline consumer price index inflation was flat in May for the first time in nearly two years.Core (less food and energy) prices rose 0.2%, a tick below expectations and a seven-month low. On a year-over-year basis, core inflation fell to 3.4%, the lowest level since April 2021.

Producer price index (PPI) inflation, reported Thursday, also surprised on the downside, defying expectations for a slight increase and falling 0.2%. On a year-over-year basis, core PPI fell back to 2.3%, marking an end to five consecutive months of increases. 

The downside growth and inflation surprises pushed the yield on the benchmark 10-year U.S. Treasury note sharply lower for the week, from 4.43% to 4.21%.

‍

In Asia

‍

Revised data showed that Japan’s GDP contracted by 1.8% on an annualised basis over the first quarter of the year, less than initial estimates of 2.0%, due largely to an upward revision in private inventories. Weakness in the first quarter had stemmed largely from the economic impact of the earthquake that hit Japan’s Noto peninsula in January and the suspension of some auto production. On the inflation front, producer prices increased 2.4% year on year in May, exceeding market expectations of a 2.0% rise.

Japan’s stock markets registered mixed weekly performance, with the Nikkei 225 Index gaining 0.3% and the broader TOPIX Index down 0.3%. The outcome of the Bank of Japan’s (BoJ’s)June meeting was viewed as broadly dovish, lending support to equities.

Chinese equities fell in a holiday-shortened week as data showed that deflationary pressures continued to weigh on the economy. The Shanghai Composite Index declined 0.61%, while the blue-chip CSI 300 gave up 0.91%. In Hong Kong, the benchmark Hang Seng Index was down 2.31%, according to FactSet. Markets in China were closed on Monday for the Dragon Boat Festival.

China’s consumer price index rose a below-expected 0.3% in May from a year earlier, unchanged from April’s rise. Core inflation, which strips out volatile food and energy costs, rose 0.6%, slowing from April’s 0.7% increase. The producer price index fell 1.4% from a year ago, its 20th month of decline, but eased from a 2.5% drop in April. Weak consumer confidence and a protracted property sector slump have kept a lid on prices in China despite numerous measures from Beijing to prop up the economy and markets over the past year.

‍

Any other business?

‍

Global oil prices practically regained all of their early June 9% losses and recorded their first positive week in a month.

The same is the case for the gold price which ends the last day of the week up around a per cent while US yields drop to two-and-a-half month lows.

‍

The week ahead

‍

Flash PMI, BoE, RBA meetings and key US, UK and China data

More central bank meetings this week in the UK, Australia, Brazil, Switzerland, Norway and Indonesia in a busy week for policy-watchers. Fresh economic indicators are also in abundance, with flash June PMI surveys accompanied by industrial production and retail sales data out of the US and mainland China as well as inflation figures from the UK and Japan.

US industrial production and retail sales figures will be tracked for second quarter GDP growth momentum. This will be important to watch after the Fed expressed further hesitation with just one rate cut now signalled in 2024 and policymakers keen to see demand come into line with supply. June's S&P Global Investment Manager Index revealed that investors' risk appetite has deteriorated amid concerns over US economic growth and as monetary policy continues to be seen as a drag for US equities.

‍

The Bank of England will meanwhile be a key major central bank meeting to watch. Although more up-to-date economic indications will arrive later in the week via the June flash PMI, UK inflation figures, due just ahead of the BoE decision, will be sought for confirmation on whether underlying price pressures - notably in the service sector - remain elevated to a degree that might rule out any rate cuts in the near future. Markets are not pricing in a rate cut until nearer the end of the year, though August may still be in play.

TheReserve Bank of Australia meanwhile has the market speculating on a hike due to high inflation, while Brazil's central bank is widely expected to pause its rate cuts.

InAsia, a busy economic calendar is filled with activity data out of mainland China. This includes industrial production, retail sales and fixed asset investment numbers. These follow Caixin PMI data showing business activity expanding at the fastest pace in a year with better conditions cutting across both manufacturing and service sectors.

Japan's May CPI will also be due just around the time of June au Jibun Bank Flash PMI release. Yen weakness was a lingering theme for rising import prices, especially among goods producers, in May. As such, CPI indications will play an important part in guiding the intensity of Bank of Japan hawkishness in the near term.

‍