Concerns over France’s fiscal position has pushed the euro to a 17-month low and weighed on French assets, though easing bets of a Fed rate hike have supported broader markets.
The pan-European STOXX 600 index rose 0.3 per cent on Monday morning, though Paris’s benchmark index fell 0.9 per cent to a fresh six-month low.
Spanish Prime Minister Pedro Sanchez called an early election in November, in a bid to strengthen his mandate following the rejection of the government’s key housing decrees.
Initial market reaction, however, was subdued as the decision was not unexpected.
Shares in Asia gained and US futures were steady.
In Brazil, stocks were expected to jump after it became clear that right-wing Senator Flavio Bolsonaro will face leftist President Luiz Inacio Lula da Silva in a presidential run-off after outperforming expectations in the first round of voting.
A Brazilian exchange-traded-fund in Frankfurt jumped 15 per cent.
The euro fell 0.8 per cent to a 17-month low of $US1.1160 overnight before recovering some ground to trade at $US1.1208.
The single currency, down about 2.5 per cent in September, has come under pressure as investors fret over France’s rising debt and political gridlock ahead of 2027’s presidential election.
The premium investors demand to hold French 10-year bonds over safer Germany shot above 150 basis points on Friday, stoking concerns of a broader spillover across European markets.
“France is the real deal in terms of risk premia for the euro,” said Saxo strategist Neil Wilson, noting the government’s plans to reduce the budget deficit still face a parliamentary process and could be watered down.
“The move in French bond yields and spreads shows the market does not have faith the government will carry out the required fiscal reform.”
On Monday, French 10-year OAT yields added 6 bps to 4.9196 per cent, while the equivalent German yields fell about 1 bps to 3.4466 per cent.
The euro’s slide gave the dollar an extra lift, adding to support from elevated US Treasury yields and pushing the greenback up 0.3 per cent to 102.194.
Sterling slipped about 0.1 per cent to $US1.3233, while the yen was broadly steady at 157.91 per dollar.
Benchmark 10-year US Treasury yields retreated by around 1 bps to 5.2686 per cent while two-year yields stood at 4.7975 per cent, down 1.5 bps.
Still, yields across major economies remain near multi-year highs as bond prices come under pressure from deteriorating government finances, a glut of debt issuance and elevated energy costs.
Trading was thin in Asia with holidays in China, South Korea and parts of Australia, though equity markets in the region took their cue from Wall Street’s gains on Friday.
Data last week showed US job growth slowed more than expected in September and the non-farm payrolls count for the prior two months was revised sharply lower, leading investors to all but rule out another Fed rate increase in October.
That helped Japan’s Nikkei rise 2.4 per cent, while MSCI’s broadest index of Asia-Pacific shares outside Japan gained 1.2 per cent.
Nasdaq futures and S&P 500 futures were both down less than 0.1 per cent.
Traders still expect a hike in December.
Oil prices edged lower as rising Middle East crude exports and a release of oil stocks by Group of Seven nations boosted supplies, offsetting concerns about further damage to Gulf oil infrastructure amid the US-Israeli war on Iran.
Brent crude futures were down 0.8 per cent at $US101.39 per barrel while US crude slid 1.4 per cent to $US89.84 a barrel.
Spot gold rose 0.5 per cent to $US4,162.9 an ounce.
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