Week ahead: France to trigger a euro crisis?

Could France trigger the next crisis for the euro? Round one general election results will show just how far the right-wing National Rally has come and whether it stands a chance of winning a majority in the French parliament.

With the election outcome uncertain and political risk premia heightened, we will be on the lookout for volatility in French government bonds and repercussions for the euro.

Fast forward to Thursday and market attention will shift to the UK, where the Labour Party is anticipated to secure a large majority.

On the data front we look ahead to Eurozone inflation data and the latest US nonfarm payrolls jobs report.

Here are the week’s key events:

Monday, July 1st: French Fallout

Will there be much fallout from the first-round voting in the French elections? Quite possibly. A second-round vote takes place a week later, but the first stage of the process will give a pretty clear indication of what the next French parliament will look like.

Marine Le Pen’s National Rally party was making further gains in polls leading up the vote and there has been a clear market impact with a heightened political risk premium evidenced by a spike in French government bond yields ever since President Macron called the snap election.

I think Markets are not very good at pricing political risk, but it’s clear there is a sensitivity to the result, which could show up most obviously in EUR crosses. Traders should also be mindful of a growing tail risk from the hard-left coalition – if the second round is a straight shootout between left and right it won’t be market friendly.

In terms of economic data, watch for the German preliminary CPI report and US ISM manufacturing PMI and prices data.

Tuesday, July 2nd: Eurozone Inflation

More inflation data is on the way with the lates Eurozone flash CPI estimates for June. After a prolonged and steady decline in inflation, the rate of price growth has started to lift again.

The euro area annual inflation rate was 2.6% in May 2024, up from 2.4% in April, whilst core inflation also ticked up 0.2 percentage points to 2.9% – any further uptick could dissuade the European Central Bank from more rate cuts in the near-term at least, though policymakers will be mindful about what’s happening in France too.

In the US, the latest JOLTS job openings report will provide some strokes of colour ahead of the payrolls report on Friday. There has been a steady decline in the number of job openings in the US, which has added to the emerging sense that the US economy is slowing down.

The number of available jobs per jobseeker dipped to its lowest in three years amid signs of normalisation in the labour market following the pandemic upheaval.

Wednesday, July 3rd:

Sandwiched between the big political risk events taking place this week is a batch of US economic data. Challenger jobs cuts, the ADP nonfarm employment report and weekly unemployment claims from the US will provide plenty of data points for traders.

The ISM services PMI is also due out as the Wall Street session gets underway. Minutes from the last FOMC meeting are also due out and should offer some further insight into what the Fed is about to do next.

Thursday, July 4th: UK Elections & US Independence Day

US markets are closed for the July 4th holiday, which could impact on liquidity throughout the session. Voting takes place in the UK, with the Labour Party widely anticipated to win a landslide victory and form the next government.

There could be some move in sterling but with the result well discounted, it may prove to be a bit of a non-event for FX markets.

With the US shut for the day the eco calendar is pretty light; Swiss CPI figures and the latest ECB monetary policy meeting accounts the highlights for the European session.

Friday, July 5th: Nonfarm Payrolls

Friday will see London open to what will likely be a new government and new resident in number 10.

Watch for any stock-specific reactions: JPMorgan analysts reckon Banks, Food Retail and Homebuilders will be the biggest beneficiaries to a Labour win, whilst it could be less positive for Transportation and Energy.

We could see a mixed reaction for Utilities with plans to boost support for renewables and networks positive for power generation, whilst water companies could face tougher restrictions on dividends and buybacks.

On the data front, US nonfarm payrolls represent the major risk event for the US session. Last month showed payrolls rose more than expected but there was also an increase in unemployment to 4% from 3.9% and wage growth reaccelerated to 4.1%.

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