European stocks experienced a slight decline on Tuesday, following a relief rally the previous day, as investors monitored the possibility of a second term for Donald Trump, causing Treasury yields to remain high. The Stoxx 600 share index and France’s CAC40 both dropped, erasing gains from the day before. The outcome of France’s parliamentary election showed the likelihood of legislative gridlock rather than a majority for extreme political parties, causing the French blue chip benchmark to rise and the premium on French debt to narrow.
Investors are closely watching the developments in the French election and whether opponents of the far right can come together to prevent their victory. In the US, investors are anticipating a potential Trump victory, which is driving up Treasury yields and supporting the dollar. The recent decision by the Constitutional Court that a president is immune from prosecution while carrying out official duties is also seen as increasing the chances of a Trump victory in the upcoming election. As a result, the benchmark 10-year Treasury yield remains elevated, signaling investor confidence in a Trump re-election.
The dollar reached a near 38-year high against the Japanese yen, reaching levels not seen since 1986, due to the support of higher U.S. yields. Japanese authorities have been closely monitoring the currency markets but have not indicated any immediate intervention. Market observers believe that further gains in USD/JPY are likely in the near term. Japan’s Nikkei share index rallied, benefiting from the weaker yen. Meanwhile, China’s yuan also weakened to a seven-month low, suggesting that authorities may be willing to allow further devaluation.
Later in the day, Federal Reserve Chair Jerome Powell and other top policymakers are expected to speak at an event in Sintra, Portugal, hosted by the European Central Bank, where monetary policy will be a key focus. Additionally, a series of critical U.S. employment data reports are due to be released, starting with the JOLTS job openings report and followed by ADP numbers and monthly payrolls figures later in the week. In energy markets, Brent futures rose, while gold prices remained flat.
Overall, global markets are closely monitoring political developments, particularly in France and the US, as well as currency movements and monetary policy decisions. The uncertainty surrounding the upcoming elections and the potential impact of a Trump re-election on fiscal stimulus and trade tariffs are driving investor sentiment and market movements. The outcome of these events will continue to influence market trends and determine the direction of various asset classes in the near term.
