Ongoing Market Commentary: Macron’s alliance losing grip

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

All three major equity indices in the US closed in mixed territory on Friday, with the Nasdaq leading gains with 1.4% rise, the S&P 500 up 0.2% and the Dow lagging behind and ending 0.1% lower, in a session dominated by dip-buyers. Still, the main averages fell for a third week in a row, with the S&P suffering its steepest drop since 2020, down 5.7%, while the Dow shed 4.8% and the Nasdaq finished 4.4% lower, as investors grew concerned that higher interest rates to fight surging inflation would drag the economy into a recession. In the meantime, European stock markets closed pretty dispersed on Friday but were all around 5% down for the week. 

Summary

• Shares in Asia were mixed on Monday with markets in Japan, South Korean, and Australia all down, falling between 0.5% to near 2%, on worries that central banks will have to tighten aggressively after the US Fed’s largest rate hike since 1994. The Hang Seng and the Shanghai Composite were muted after the PBoC held steady its key rates for corporate and household loans at June fixing. 
• European markets are set for a lower open while Wall Street will be closed today for the Juneteenth holiday. 
• Oil prices were steady this morning after a sharp drop in the previous session, with volatility set to continue as investors weighed concerns about slowing global economic growth and fuel demand against expectations of higher near-term demand. 
• Chinese President Xi Jinping on Friday emphasised his country’s commitment to trading with Russia, despite Western sanctions, expecting trade between the two countries to hit new records in the coming months.  
• French President Emmanuel Macron is projected to suffer a major blow, with his centrist alliance failing to keep its outright majority in parliament, following an unexpected surge in support for the far right in Sunday’s election. With no group near an outright majority, Macron may be able to keep control of the executive branch but will have a hard time passing legislation, putting much of his second-term agenda at risk. 
• Bitcoin struggled to hold above the closely-watched $20,000 level, extending a period of market volatility that saw huge weekend swings. The largest cryptocurrency fell as much as 4.8% to $19,618 in Asia on Monday. The pattern of swings suggests sentiment remains highly fragile as the Fed goes full-throttle to fight inflation with rate hikes that drain liquidity from markets. 
• Bloomberg reported last Friday that BNP Paribas is interested in the potential acquisition of Dutch state-controlled lender ABN Amro. The French lender contacted the Dutch government to discuss the transaction but the latter is not considering a sale of the company. The Dutch state may instead sell ABN Amro’s shares in the market to keep some control of the business. 
• In the week ahead, investors will be paying attention to several speeches by Fed officials, including Fed Chair Powell’s testimonies before the Senate Banking Panel and House Financial Services Committee. Also, flash PMI surveys for the US, UK, Eurozone, Japan, and Australia will be closely watched.  Finally, CPI data for the UK, Canada, and Japan is set to be released.