Stocks and bonds on Wall Street remained relatively strong after last week’s busy macroeconomic week, with global markets further dragged down by French political uncertainty and a deepening housing price collapse in China.
While there are issues overseas, Wall Street stock futures remained close to last week’s new record highs on Monday as Goldman Sachs raised its 2024 target for the S&P500 to 5,600, compared with 5,200 earlier and 5,431 at Friday’s close.
The investment bank cited the five mega-cap tech stocks’ strong earnings growth and a higher price-to-earnings ratio.
Although long-term U.S. Treasury yields fell below 4.2% last week for the first time since April 1, as inflation resumed and Federal Reserve policymakers took a firmer stance, the dollar still jumped, recording its best week in nearly two months.
That is largely due to investor fears over French President Emmanuel Macron’s decision to call an early legislative election next month as France’s far-right leads the polls in this year’s European Parliament elections.
With France’s sovereign credit ratings on the line and the fiscal implications of a change in parliamentary majority a concern, the premium on French 10-year sovereign debt yields over Germany rose last week to the highest level since 2017, by more than 77 basis points.
The French stock benchmark, the CAC40, fell 4.6% on the week, underperforming Wall Street and global indexes by 6.8% and 5.5% respectively.
Although French stocks and bonds eased somewhat on Monday, potential ruin in the heart of the eurozone sent the euro to a six-week low against the dollar on Friday, recovering only modestly on Monday to regain a foothold above 1.07.
Eurozone sovereign debt spreads also widened, although eurozone stocks steadied on Monday.
Global equity strategists at Wall Street bank Citi cut European stocks from “overweight” to “neutral,” citing heightened political risks in France.
The European Central Bank’s chief economist, Philip Lane, said on Monday that the turmoil in eurozone bond markets, centered on France, has not been disorderly so far, downplaying the need for the ECB to intervene.
“What we’re seeing in the markets is an appreciation in prices, but it’s not a disorderly market at the moment,” Lane said in an interview with Reuters NEXT Newsmaker at the London Stock Exchange.
The situation in Asia did not improve after China’s latest monthly economic data was scanned and the People’s Bank of China left its key interest rates unchanged.
While China’s retail sales beat forecasts in May, industrial production fell short of expectations.
But after the new deflationary signals China sent last week, the real estate sector remains the biggest source of concern.
New home prices in China fell 0.7% in May, marking the 11th straight monthly decline and the biggest drop since October 2014. The central bank last month announced an affordable housing lending program to help boost sales of unsold homes.
Chinese stocks and the offshore yuan fell slightly.
Japan’s Nikkei index underperformed, falling almost 2% below the key psychological level of 38,000 for the first time this month, as a risk-off mood prevailed amid concerns about economic growth both at home and abroad.
Toyota Motor fell 2.6% on continued fallout from a certification scandal, with auto-related stocks among the worst-performing sectors. National broadcaster NHK reported that Toyota would extend the production halt of affected models for at least another month until the end of July.
Japanese Prime Minister Fumio Kishida also said Monday that he has no intention of ordering or requiring the government’s pension fund to buy the Bank of Japan’s exchange-traded fund holdings.
Kishida also said the government and the Bank of Japan (BOJ) shared the view that consumption lacked strength as wages had not risen enough to offset rising prices.
With doubts about the timing of further BOJ tightening, the dollar also appreciated against the yen.
Key agenda items that could drive US markets later on Monday: * New York Fed President John Williams, Philadelphia Fed President Patrick Harker and Fed Governor Lisa Cook speak; European Central Bank Vice President Luis de Guindos speaks * US Treasury auctions 3- and 6-month bills * Results from US companies: Lennar, Quantum
