Asia stocks cautious as EU politics muddies the mood By Reuters

By Wayne Cole

SYDNEY (Reuters) – Asian stocks were in a cautious mood on Tuesday, with investors pondering new political uncertainty in European markets after right-wing election gains and a snap election in France revived concerns about the bloc’s cohesion.

The moves were mostly modest, with MSCI’s broadest index of Asia-Pacific shares outside Japan falling 0.5% in thin trade. Major Chinese stocks fell 1.2%, after closing on Monday, while the yuan hit its lowest level in seven months.

In the other direction, the stock index rose by 0.3% and South Korean stocks rose by 0.4%.

EUROSTOXX 50 futures rose 0.2%, stable after Monday’s decline, while they were flat.

The euro, French stocks and government debt were shaken after investors assessed whether the right could repeat its success in French elections and how much influence far-right parties could have over the European Union’s new executive.

Bond yields rose across Europe, with the spread between French and German debt widening significantly, after an opinion poll suggested the far-right National Rally party could win early elections, albeit without a clear majority.

The opposition left-wing parties in France pledged late Monday evening to work together and nominate joint candidates.

Elsewhere, markets gave a muted reaction to Apple’s (NASDAQ:) long-awaited AI strategy, which integrates “Apple Intelligence” technology across a range of applications. The iPhone maker’s shares fell 0.3% in after-hours trading, after falling 1.9% in regular hours.

Nasdaq and NASDAQ futures fell 0.1% in Asian trading, after rising on Monday.

So far, the market has proven remarkably resilient in the face of the jump in US bond yields that followed Friday’s jobs report and declining expectations for interest rate cuts by the Federal Reserve.

“We see diminishing prospects for easing this year, and now expect the Fed to make its first cut only in November,” analysts at JP Morgan said.

“Stocks appear to be ignoring a slew of risks, including politics, geopolitics, narrow market concentration and an increase in meme stocks and cryptocurrency trading that may indicate churn,” they added. “As such, we maintain a defensive bias in our model portfolio.”

One piece or two?

Futures point to 38 basis points of Fed easing for the year, compared to 50 basis points before the jobs report.

The Fed is sure to hold steady at its policy meeting on Wednesday, with focus on whether to keep three rate cuts in its “dotted” forecast for this year.

“We expect the points to show two cuts in 2024, four cuts in 2025, three cuts in 2026, and a slight uptick in the long-term or neutral rate,” Goldman Sachs analysts said in a note.

“We believe leadership prefers a two-piece baseline to retain flexibility, but a one-piece baseline represents a potential risk, especially if core CPI surprises to the upside on Wednesday.”

The Consumer Price Index (CPI) is expected to rise 0.1% in May, but with the core index up 0.3%.

In the currency markets, the euro settled around $1.0768, after overnight recording its lowest level in a month at $1.0733. It lost about 1.1% in the past two sessions, affected by US jobs reports and political uncertainty.

The dollar was broadly supported at 157.27 yen, just below its May high of 157.715 yen.

The weak yen is one reason why the Bank of Japan (BoJ) may decide to reduce its bond purchases at its policy meeting on Friday, as a step towards raising interest rates again.

Gold was just above a one-month low of $2,302 an ounce, after being shocked by lower market prices due to US interest rate cuts. [GOL/]

Oil prices extended a 3% rise on Monday, as several investment banks pointed to strong summer fuel demand and potential purchases of oil reserves.

© Reuters.  FILE PHOTO: Passersby walk past an electric screen displaying Japan's Nikkei stock average outside a brokerage firm in Tokyo, Japan on February 13, 2024. REUTERS/Issei Kato/File Photo

Markets are also awaiting monthly oil supply and demand data from the US Energy Information Administration and OPEC on Tuesday, and from the International Energy Agency on Wednesday. [O/R]

It fell seven cents to $81.56 per barrel, while US crude settled at $77.74 per barrel.

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