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Weekly Investment Insights

Concerns about the political situation in France reverberated around the world last week, spurring a drop in equity prices and a flight to safer assets. French stocks recorded their worst week since 2022, losing roughly $200 billion in market capitalization – comparable to the size of the entire Greek economy. By the end of the week, even US stocks were not immune to the negative sentiment. The S&P 500 retreated after having hit fresh highs earlier in the week on cooler-than-expected inflation data.

French political situation shakes markets

After a win for the French far-right in the European elections, the country will go to the polls on June 30 and then on July 7, to vote for a new National Assembly.

Macron’s approval rating has dropped to an all-time low of 24% and polls suggest that the main opposition to a far-right government could be a coalition on the left, made up of Parti Socialiste, La France insoumise, Parti communiste français and Europe Ecologie-Les Verts. This is raising concerns about debt sustainability.

Marine Le Pen’s Rassemblement National, which is leading the opinion polls ahead of the legislative elections, is proposing a reduction in VAT, notably to 5.5% on energy, food and gasoline. The coalition on the left has agreed on a common program that unwinds many reforms put in place over the last seven years. Proposals include lowering the retirement age and introducing a new wealth tax.

Rating agency S&P Global, which recently downgraded France's credit rating, warned this week that policies pushed by the far-right party could impact the rating. Bruno Le Maire, French Finance Minister, warned that a victory by the new left-wing alliance would lead to the country’s EU exit as its program would cause an economic collapse.

The risk premium on French government bonds soared to a four-year high on Friday, signaling the financial market's unease over France's economic stability.

The euro is the worst performing major currency this week against the US dollar. The latter approached its highest level since November.

Fed keeps rates on hold: Dot-plot shows one cut this year, down from three

By the end of the week, following the turmoil in Europe, the Fed’s meeting felt like a distant memory. The US central bank kept its key rate unchanged at 5.25-5.5%, as expected. The real surprise came from the refreshed dot plot (a graphical representation of policymakers' expectations for the path of interest rates). It was decidedly more hawkish, with the median FOMC member expecting only one rate cut this year, down from three anticipated in March. Inflation forecasts were revised slightly upwards for this year and next.

Powell’s press conference after the meeting did not emphasise the hawkish dot plot shift, while he noted that “the most recent inflation readings have been more favorable”, a comment that the market liked.

US CPI Inflation comes in below expectations

US inflation unexpectedly slowed to 3.3% in May, the lowest in three months, compared to 3.4% in April and forecasts of 3.4%. Month-on-month, inflation was 0%.

Inflation eased for food (2.1% vs 2.2%), shelter (5.4% vs 5.5%), transportation (10.5% vs 11.2%) and apparel (0.8% vs 1.3%), while energy costs rose at a faster pace (3.7% vs 2.6%). In an encouraging sign, sticky services inflation softened, falling from 5.3% YoY to 5.2%.

That softness was evident among core inflation too. Core inflation, which excludes volatile categories like food and energy, slowed to 3.4%, the lowest rate since April 2021 and below consensus forecasts of 3.5%. On a monthly basis, core inflation fell to 0.2% from 0.3% (versus 0.3% expected).

Later in the week, US PPI, which measures wholesale inflation, was shown to have fallen by 0.2% MoM in May, following a rise of 0.5% in April. Goods prices fell by 0.8%, the biggest fall since October 2023, energy prices also fell, -4.8%, while services prices were unchanged, after rising by 0.6% in April.

In all, the data raised hopes that US price pressures are alleviating again after an uptick through Q1.

UK economy gets stuck in the mud as the general election approaches

UK GDP growth was flat in April, after coming in at +0.4% in March. One reason for that is a rainy spell which appeared to curtail retail sales and construction. Manufacturing output fell more sharply than expected, by 1.4%, due to weakness in pharmaceuticals and the production of food, beverages and tobacco, while services grew by 0.2%, driven by computer programming, consulting and publishing.

Beyond the weather, tight monetary policy is also dampening prospects, with interest rates at a 16-year high evidently weighing on consumer and corporate finances.

The labour market showed signs of a slowing in Q2, with the unemployment rate at its highest level in two-and-a-half years (4.4% in April) and the number of job vacancies continuing to fall.

The market sees 1-2 rate cuts for the BoE in 2024, the first not before this summer.

Additional tariffs on imported Chinese EV

As announced last month in the Weekly Investment Insights, the United States has raised its tariffs on Chinese EV imports from 25% to 100%, and now Europe is playing a similar card. In addition to the 10% tariff already applied on Chinese EVs, the European Commission has notified carmakers that it will apply additional tariffs of up to 38% on imported Chinese electric vehicles from next month.

This is a provisional decision for a period of four months from 4 July, which suggests that China and the EU still have the opportunity to reach a new agreement. Member States will be asked to decide on these duties by November 2. If they decide to press ahead with the tariffs, potential retaliation from China in response to recent moves by the US and Europe could backfire on firms that sell their goods in China’s vast market. From the Chinese perspective, while duties would make exporting to the EU less attractive, China’s EV export push is likely to continue in the coming years, given the tighter profit margins at home, substantial investments in new production facilities, and the ambitious targets for the European market. The EU has remained open to Chinese investments in the EV sector. If more Chinese brands were to announce plans to invest in local production facilities in Europe, this could alleviate pressures in the bilateral trade relationship.

Peak oil?

Also on the topic of EVs, the IEA’s latest report suggested that due to the increasing use of electric cars and the consequent switch from oil to electricity generation, growth in oil demand will peak at 105.6 million barrels per day (bpd) by 2029, before declining slightly in 2030. Supply capacity will reach almost 114 million bpd by 2030, or 8 million bpd more than forecast demand, showing a major supply surplus emerging.

BoJ announces new economic plan

The Bank of Japan has decided to maintain interest rates at their current levels, 0-0.10%, but has indicated that it wants to reduce its bond purchases. The decision will be taken in July, when a plan will be drawn up to reduce purchases in the future. In the meantime, it will continue to buy government bonds at its current rate.

Economic calendar for the week ahead

Monday – China Industrial Production and Retail Sales (May).

Tuesday – Eurozone and Germany ZEW Economic Sentiment (June). US Retail Sales and Industrial Production (May).

Wednesday – UK Inflation Rate (May). Japan Balance of Trade (May).

Thursday – Eurozone Consumer Confidence (Flash, June). Germany PPI (May). UK BoE Interest Rate Decision.

FridayEurozone, Germany, UK and US PMI (Flash, June). UK Retail Sales (May), Gfk Consumer Confidence (June). Japan Inflation Rate (May).