Morning Bid: Upbeat US eyes French concerns, China housing troubles

Market Overview: Wall Street and Global Tensions

As the trading week began, Wall Street stocks and bonds maintained their strong position following last week's significant economic events. Global focus shifted towards political uncertainties in France and China's burgeoning housing crisis.

Wall Street Resilience

Despite international turmoil, U.S. stock futures remained near last week's record highs. Goldman Sachs adjusted its 2024 year-end target for the S&P500 to 5,600, up from 5,200, citing robust earnings from mega-cap tech companies and an improved fair value price-to-earnings ratio. Long-term U.S. Treasury yields dipped below 4.2%—a first since April—due to ongoing disinflation and the Federal Reserve's hawkish stance. Nevertheless, the dollar saw its best performance in nearly two months, driven by apprehensions over the French political landscape.

French Political Uncertainty

French President Emmanuel Macron’s call for snap parliamentary elections next month has unsettled investors, particularly with the French far-right performing well in recent European elections. The ripple effect saw French 10-year government debt yields over Germany's reach their highest point since 2017, reflecting increased risk premiums. The CAC40 benchmark skidded 4.6% over the week, notably underperforming against Wall Street and other global indices. While Monday saw minor improvements in French stocks and bonds, the euro remained weakened, hitting six-week lows before a slight recovery.

Impact on European Markets

The upheaval has caused broader eurozone government debt spreads to widen, prompting financial institutions to adjust their positions. Notably, Citi downgraded European equities from overweight to neutral due to rising political risks. European Central Bank (ECB) Chief Economist Philip Lane, however, downplayed the market volatility, suggesting the situation was manageable and did not yet warrant intervention by the ECB.

China’s Economic Challenges

In Asia, conditions were no better following China's latest economic reports and the People's Bank of China holding interest rates steady. Although retail sales performed better than expected in May, industrial production fell short. With Chinese new home prices declining for the 11th consecutive month—marking the steepest drop since 2014—the property sector remains a significant concern. This has led to a drop in Chinese stock markets and the offshore yuan.

Japan’s Market Struggles

Japan's Nikkei index fell nearly 2%, dropping below the pivotal 38,000 mark amidst global economic growth worries. Toyota Motor experienced a 2.6% decline amid ongoing fallout from a certification scandal, adversely affecting car-related shares. Japan’s economic outlook remains cautious, particularly regarding consumer spending and wage growth. Prime Minister Fumio Kishida stated there would be no governmental intervention to boost BOJ holdings, further weighing on investor sentiment.

Key Events to Watch

Looking ahead, several significant events could drive market direction. Notable items on the U.S. agenda include the New York Fed's June manufacturing survey, Federal Reserve speeches, and Treasury bill auctions. Corporate earnings reports from companies like Lennar and Quantum will also be closely monitored for their market impact.