Stocks Hit New Highs Amid French Surprise, Reuters Reports

A Look at the Day Ahead in U.S. and Global Markets

As the week begins, Wall Street stocks are starting off strong, buoyed by recent record highs amid the incoming earnings season and anticipated testimony from the Federal Reserve. The unexpected election results in France have shifted the political landscape, with left-wing candidates successfully preventing Marine Le Pen’s far-right party from gaining a majority, resulting in a hung parliament.

In the U.S., Treasury yields remained relaxed early on, and the dollar faced downward pressure following Friday’s employment report for June, which indicated a cooling labor market. This data has contributed to increased expectations for two potential rate cuts by the Federal Reserve this year.

Federal Reserve Chair Jerome Powell is set to testify before Congress on Tuesday and Wednesday, following his previous remarks in Portugal. However, stock market focus is expected to shift toward second-quarter corporate earnings reports, starting with the major U.S. banks later this week.

European markets are buzzing with political developments, particularly the surprising outcomes from France’s second-round assembly elections. The far-right party not only failed to secure a majority but ended up in third place behind the left-wing alliance and President Emmanuel Macron’s centrist party. The market reacted positively, relieved that the lack of a dominant party in parliament suggests potential policy gridlock, which may ease fiscal concerns surrounding both the left and right’s tax and spending agendas.

While the new political setup poses challenges for next year’s budget negotiations amid European Union pressures to adhere to budget rules, the overall parliamentary configuration is similar to the pre-election scenario. French stocks climbed nearly 1%, government debt yields declined over 5 basis points, and the risk premium compared to German bonds edged down to 66 basis points. The euro maintained its three-week highs against a weaker dollar.

Meanwhile, in the U.K., the pound strengthened in light of a new government, reaching its highest level since mid-June. Following a significant electoral victory on Thursday, the Labour Party now holds a majority of over 170 seats in parliament. Finance Minister Rachel Reeves is expected to announce plans aimed at reviving infrastructure projects and encouraging private investment through a new "national mission" focused on boosting economic growth. Additionally, the new foreign minister, David Lammy, expressed intentions to "reset" the U.K.’s relationship with the EU.

In U.S. politics, the atmosphere is more complex. Despite ongoing pressure for President Joe Biden to consider stepping aside, most Democrats continue to support him, and opinion polls indicate favorable standing in key marginal states.

U.S. stock futures held steady, hovering near Friday’s new record highs, while 10-year Treasury yields remained around 4.3%. In contrast, global stocks appeared generally optimistic, with the MSCI all-country index reaching an all-time high. However, Chinese stocks continued to struggle, with mainland indexes falling for the fifth consecutive session and showing losses for the year.

The People’s Bank of China announced new measures involving temporary bond repurchase agreements to enhance market operations and maintain sufficient liquidity in the banking system.

Key developments to watch for in U.S. markets later today include trends in employment for June and consumer credit data from May. Furthermore, a member of the Bank of England’s Monetary Policy Committee is set to deliver remarks, and the U.S. Treasury will auction off 3- and 6-month bills.