Yen Rebounds As UK & French Elections Approach

European and UK stocks are expected to open higher on Thursday after US stocks hit record highs on Wednesday, which can be attributed to the surge in market expectations for a Fed rate cut in September, reaching more than 70%. The US ISM Services Index fell sharply in June, from 53.8 to 48.8. The details of the report further prove that the US economy is weakening, thus requiring the Fed to cut interest rates in early autumn: the new orders index fell to 47.3, the lowest level since late 2022; the employment index also fell from 47.1 in May to 46.1, falling further into contraction territory.

The yen was boosted, but not enough to turn around

As we mentioned yesterday, the US economic data has been weak, which has put pressure on Treasury yields. The 13 basis points drop in US Treasury yields helped the yen rebound modestly after falling to a record low. USD/JPY retreated from 162.00 and is currently trading around 161.50. US markets are closed today for the July 4th holiday.

French deficit widens again, but markets don’t seem to care

Overall, we expect a relatively calm market performance on Thursday, the calm before a potential storm. The UK will vote today, and ahead of the French election, 10-year, 9-year, and 40-year bonds will be auctioned at 9:50 local time. This auction is worth watching as it is the longest-dated bond auctioned by France in some time, and it comes after France reported a budget deficit of -113.5 billion euros in May (-91.6 billion euros previously). This is the largest deficit at the beginning of the year in more than 5 years, and it also comes at a tricky time for France, as markets are concerned that the new government may further drag down the budget deficit. The news did not affect market sentiment towards French assets, and French stocks rebounded sharply on Wednesday and are expected to open higher again today. In addition, the yield gap between France and Germany continues to narrow, indicating that voters are less concerned about the results of the second round of French parliamentary elections this Sunday. EUR/USD retreated from 1.08 after moving higher this week, however, the momentum is currently to the upside and if French assets continue to recover, then the target for EUR/USD could be 1.10.

UK Election: No Political Risk Premium

Voting has already begun in the UK general election. It is worth noting that the FTSE 100 has fallen by about 2.5% since Prime Minister Rishi Sunak first called for a general election on May 22, but this is mainly due to some individual stocks struggling due to internal problems, such as GlaxoSmithKline (GSK). The FTSE 250, which is more focused on the domestic market, fell by only 1%. In the short term, the share prices of the largest banks and housebuilders in the UK have risen, the latter due to expectations that they will receive incentives from the next government to build more homes, while the rise in bank stocks suggests that the market may also believe that a possible change of government is good for the UK economy.

During the election, the pound has mostly traded sideways in a narrow range, and the 10-year gilt yield has remained largely unchanged since May 22, suggesting that there is no political risk premium in UK asset prices in this election.

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