By Ray Wee
SINGAPORE (Reuters) – Asian stocks fell on Monday as traders significantly reduced their bets on a cut in interest rates by the Federal Reserve this year in light of the continued tightening of the US labor market, while the call for early elections in France raised concerns. Broader political issues have burdened the euro.
Trading was thin in Asia with Australia, China, Hong Kong and Taiwan away for public holidays, but MSCI’s broadest index of Asia-Pacific shares outside Japan was still down 0.33%.
US futures rose slightly, with S&P 500 futures and Nasdaq futures rising about 0.03% each, reversing minor losses incurred earlier in the session.
The dollar returned to the lead, while US Treasury yields remained high.
The pause in the global risk rise came on the back of Friday’s non-farm payrolls report, which showed that the US economy created much more jobs than expected in May and annual wage growth accelerated, underscoring the resilience of the labor market.
Futures now show roughly 36 basis points of cuts priced in by the Fed, down from 50 basis points last week. The likelihood of a easing cycle starting in September has also increased.
The latest developments come ahead of the Fed’s policy decision on Wednesday, with US inflation numbers for May released immediately before that.
“It will be very difficult for the Fed to continue forecasting three rate cuts this year,” said Rob Carnell, ING’s regional head of research for Asia Pacific.
“Quite a few Fed spokespeople are talking about the possibility of just one (cut). While the most likely outcome is that we’ll see all three go to two, it’s possible we could go to just one.”
US Treasury yields similarly rose on Monday, reflecting expectations of higher long-term US interest rates. [US/]
The two-year bond yield and the 10-year benchmark yield rose by about two basis points to 4.8931% and 4.4512%, respectively.
Against the dollar, the yen fell more than 0.2% to 157.09. The dollar index, which measures the US currency against a basket of six peers, rose to 105.29.
Japan’s Nikkei rose 0.9%, supported by a weak yen.
The Bank of Japan (BOJ) is also holding a two-day monetary policy meeting this week and could provide new guidance on how it plans to taper its massive bond purchases.
Early elections
In France, President Emmanuel Macron called on Sunday for early legislative elections later this month after his defeat in the European Union vote by Marine Le Pen’s far-right party.
Macron’s shocking decision caused a political earthquake in France, as it provided the far right with an opportunity to gain real political power after years of marginalization, and threatened to neutralize his presidency three years before its end.
The euro fell to a one-month low in the wake of the announcement amid growing uncertainty about Europe’s future political direction. It decreased in recent trading by 0.5% to $1.0749.
Futures were similarly lower, with EUROSTOXX 50 futures losing 0.42% while French bond futures fell 0.3%. FTSE futures fell 0.7%.
“Macron’s decision, seen as a calculated risk, comes as he struggles to obtain a parliamentary majority, making legislative progress difficult,” said Cher-Li Lim, senior Asia-Pacific currency market analyst at Convera.
“We still expect bearishness on (the euro) in the short term.”
In commodities, oil prices last rose, supported by hopes of higher fuel demand this summer, although their gains were capped by a stronger dollar.
Brent crude futures gained 0.26 percent to $79.83 per barrel, while US West Texas Intermediate crude futures rose 0.24 percent to $75.71 per barrel. [O/R]
The spot price of gold rose 0.13 percent to $2,295.29 per ounce. [GOL/]
(Editing by Sonali Paul and Sam Holmes)
