Major European stock markets will open with little direction on Monday ahead of the release of monthly US employment data, which will be the highlight of the week in the current context of upward revisions to interest rate hike expectations. Futures contracts for the major indexes are currently pointing to a flat or near-flat opening for the CAC 40, while in Frankfurt the DAX is expected to rise by around 0.4%, as does the Euro STOXX 50 index.
In observance of the Independence Day holiday on Friday, the U.S. Labor Department plans to release employment statistics for June a day early, starting Thursday.
Economists forecast an average of about 120,000 new nonfarm payrolls will be created, matching the 120,000 new jobs reported for May. The unemployment rate should remain unchanged at 4.3%.
A crucial test for the trajectory of US rates
Investors will be keeping an eye on any signs of good health in the labor market following the recent release of robust inflation numbers that have many of them reconsidering their scenario for how Federal Reserve rates will evolve in the coming months.
The market now pegs the likelihood of a quarter-point rate cut at the end of July at more than 29%, up from just 6% a month earlier, according to CME’s FedWatch barometer.
Markets’ reaction to the employment data will be critical to the continuation of the rotational movement that has occurred recently in global markets, especially as JOLTS and ADP data further clarify the picture.
“The strong data will support the idea that the Fed will have to focus less on the labor market and refocus on persistent inflation pressures as it continues its efforts to return inflation to target,” warns Michael J. Cramer, founder of Mott Capital Management.
“Such a scenario could be very troublesome for risk assets, particularly the S&P 500, which has struggled to regain momentum since its June 2 peak,” the strategist warned.
Investors are adjusting their positions
With the Middle East calming and subsequent decline in oil prices, whose sharp rise has particularly hit Europe, as well as concerns about the sustainability of significant investments in artificial intelligence across the Atlantic, New York markets have largely underperformed their European peers over the past week.
The S&P 500 fell 1.9% last week, the Nasdaq Composite fell 4.6%, while the STOXX 600 limited its decline to about 0.5%.
It is possible that markets will also fall under the influence of flow logic as the first half of the stock market is now coming to an end.
“Many institutional investors are selling their shares after making good profits, which is a common occurrence in June, while individuals continue to be massive buyers,” recalls Alexander Schont of iBanFirst.
“A certain amount of caution is beginning (…) to emerge in the medium term, which partly explains the decline in markets observed in recent days,” the analyst emphasizes.
Europe also has a busy schedule.
In Europe, the week will largely be marked by the ECB’s annual meeting, which takes place from today until Wednesday near Sintra, Portugal.
Eurozone consumer price (CPI) data due on Wednesday could show inflation has peaked, with some economists forecasting the annual rate falling to 2.8% in June from 3.2% the previous month.
With reduced appetite for equities, government bond yields are falling, especially in the US, even as expectations for higher yields increase. The 10-year US Treasury rate, although very sensitive to expectations for the Fed, is hovering around 4.3720%, its lowest level since early May.
The euro is trying to recover against the dollar and is trading around 1.1395 against the US dollar. With losses of 3% since the beginning of the year, the single currency is now at a yearly low compared to the US currency.
The dollar was slightly lower against a basket of base currencies, extending losses of recent days: the US dollar is now down more than 0.3% on the week against a basket of base currencies.
After three weeks of sharp declines in a row, the price of a barrel is starting to rise again, and the agreement signed between Israel and Lebanon was once again weakened this weekend by Israeli strikes and the rejection of the text by the head of the Lebanese parliament.
Brent is currently up 0.1% at $72.1 a barrel, while US light crude (West Texas Intermediate) is up 0.7% at $69.7.