The Impasse in France is probably the best case for markets.

No party won an outright majority of 289 seats in the second round of the parliamentary election in France, heralding a long period of talks to form a coalition government. The left-wing New Popular Front won 182 seats. President Emmanuel Macron’s Ensemble came in second, with 168. The hard-right National Rally won 143 seats.

When it comes to France’s turbulent politics, the current impasse is probably the best investors could have hoped for given the potential alternatives.

The second round of French legislative elections delivered a widely expected hung parliament, but not its predicted makeup: Rather than coming in first, Marine Le Pen’s far-right and anti-immigrant National Rally finished third. In a shock twist, the leftist New Popular Front alliance emerged victorious, with the party of President Emmanuel Macron and its allies in second place.

This is because leftists and centrists ended up coordinating. In many local races, candidates dropped out to avoid dividing the vote against the far right. Still, no party has an outright majority, which plunges the country into political gridlock. This was, counterintuitively, the preferred outcome for financial markets.

What matters for sectors battered in the stock market, including banks, energy firms and infrastructure operators, is that the risk of widespread tax increases, nationalizations and a prolonged standoff with Brussels seems smaller now than a few weeks ago. Whatever Mélenchon says, the left will either have to compromise or else form a minority government that might scare investors but wouldn’t be able to pass laws.

In the UK, data was strong showing the UK economy grew by 0.4 per cent in May, double the expected figure, driven by continued expansion in the services sector and a rebound in housebuilding.

The month-on-month rise followed zero growth in April, the Office for National Statistics said on Thursday and exceeded a 0.2 per cent forecast for May. Sterling rose 0.7 per cent against the dollar to $1.2941, its highest in almost a year, boosted by the UK GDP numbers and then lower than expected US inflation data. On a rolling three-month basis, the economy grew 0.9%, the fastest pace since 2022.

Three Bank of England rate-setters indicated that they were still reluctant to vote in favour of lower borrowing costs, prompting markets to scale back bets on a rate cut at the central bank’s August 1 meeting.

Chief Economist Huw Pill said the BoE had made “substantial progress” in bringing down inflation but noted that key drivers, such as wage growth and services inflation, were still showing “uncomfortable strength.” Jonathan Haskel and Catherine Mann, both regarded as hawkish on monetary policy, indicated that they would rather hold rates steady until evidence of a sustained drop in services inflation emerged.

As usual, the BoE will be slower to act than it should be. Arguably it should have already started to lower rates along with the European Central Bank, but the fear of being blamed when inflation ticks up in August (which it will do due to a -0.4% reading last July) may outweigh doing the right thing.

In the markets, the STOXX Europe 600 Index ended the week 1.45% higher as investors welcomed lower-than-expected U.S. inflation data and a little calm in Paris.

Other major stock indexes rose as well. France’s CAC 40 Index was up 1.27%, Italy’s FTSE MIB 1.74%, and Germany’s DAX gained 1.48%.

The FTSE 100 Index lagged a little with an increase of 0.60%.

French and German sovereign bond yields were lower across the curve, falling in sympathy with U.S. Treasury yields.

In the US stocks moved higher in the first notably broad advance since mid-April. The Dow Jones Industrial Average, S&P 500 Index, and technology-heavy Nasdaq Composite moved to record intraday highs, but the biggest advance was notched by the small-cap Russell 2000 Index, which gained 6.00%, marking its best week since early November. As measured by various Russell indexes, value stocks also handily outperformed growth stocks.

As interest rates start coming down, money will look to move away from the Big 5 which account for over 50% of the S&P 500’s returns so far this year, and into other more diverse areas. Big tech has become a safe haven for capital over the last year, which is similar to what we saw in 2020 and 2021 before it all came crashing down in 2022. Traders will be aware of this and it is a scenario they will be keen to avoid again.

The unofficial start of earnings season kicked off Friday, with second-quarter earnings releases from JPMorgan Chase, Wells Fargo, and Citigroup. Shares of all three fell at the opening of trading, with JPMorgan and Wells Fargo both missing estimates and the latter cutting its outlook. As of the end of the week, analysts polled by FactSet were expecting growth in overall earnings registered by the S&P 500 to accelerate from 5.9% in the first quarter to 9.3% in the second, which would mark the fastest rate since the first quarter of 2022.

A major factor supporting many stocks, if not the price-weighted benchmarks, was Thursday’s release of the Labor Department’s consumer price index (CPI). Headline prices fell 0.1% in June, marking the first decline since soon after the start of pandemic lockdowns in May 2020. More encouraging, perhaps, core (less food and energy) prices rose a less-than-expected 0.1%, the slowest pace in over three years. At a roundtable hosted by the Chicago Federal Reserve, Chicago Fed President Austan Goolsbee called the data “profoundly encouraging” and a sign that inflation was on its path back to the Fed’s annual target of 2.0%.

The market’s reaction to the data was notably mixed, however. As mentioned in the wake of the report, the Russell 2000 Index outperformed the large-cap S&P 500 index by 209 basis points, according to our traders, while besting the Nasdaq Composite by 581 basis points. Moreover, according to Bespoke Investment Group, it was only the second time since 1979 that the Russell 2000 rose by over 3% while the S&P 500 finished the day in the red - the first was October 2008.

In Asia, Japanese stocks retreated at the end of the week from the record highs they reached on Thursday amid heightened speculation that the authorities intervened in the foreign exchange markets to support the Japanese yen.

The speculation was triggered by a surge in the value of the yen against the U.S. dollar and was reinforced by a Nikkei report that the Bank of Japan conducted rate checks with banks on the euro-yen currency cross on Friday after the yen rose. A stronger yen hurts the profit outlook for Japan’s export-focused industries and makes Japanese assets more expensive for foreign investors.

The yield on 10-year Japanese government bonds eased to around 1.05%, a two-week low, as investors assessed the outlook for monetary policy after the sharp rebound in the yen.

Chinese stocks gained as strong export data offset concerns about deflationary pressures. The Shanghai Composite Index rose 0.72% while the blue chip CSI 300 added 1.2%. In Hong Kong, the benchmark Hang Seng Index was up 2.77.

Exports exceeded forecasts in June, rising 8.6% from a year earlier, up from 7.6% growth in May. Analysts attributed the strength in overseas demand to manufacturers frontloading shipments ahead of potential tariff hikes from several major trading partners. However, imports unexpectedly shrank 2.3% in June, down from May’s 1.8% gain amid weak domestic demand. The overall trade surplus increased to a multi-decade high of USD 99.05 billion from USD 82.62 billion in May.

China’s consumer price index rose a lower-than-expected 0.2% in June from a year earlier, narrowing from May’s 0.3% rise. Core inflation, which strips out volatile food and energy costs, rose 0.6%, unchanged from May. The producer price index fell 0.8% from a year ago, marking its 21st month of decline, but eased from a 1.4% drop in May.

The Week Ahead

Next week should see another set of UK data confirming Keir Starmer got an economic gift from his Tory predecessor Rishi Sunak.

A month ago, May figures showed UK inflation eased back to the BoE's 2% target for the first time since July 2021.

Some estimates for June suggest annual headline inflation might drop below 2% this time but the most likely outcome is that it remains steady at 2%. This will increase next month for the reasons mentioned above, but it should then fall below 2% again by September as higher readings from last year fall off the 12-month period.

For June, another low monthly CPI figure of around 0.2% will be good news for the Bank of England and could raise expectations of an August or September rate cut.

The market currently sees a 57% chance of a rate cut in August, with fewer than two rate cuts priced in for the year.

Company news this week sees updates from wealth platforms AJ Bell and Hargreaves Lansdown that should give an insight into the financial mood of the UK population following the election.

Burberry might be affected by the apparent fleeing of super-rich non-doms following Labour’s landslide having already been very critical of the previous government's 'tourist tax' or not exempting overseas visitors from VAT on purchases.

Otherwise, Ocado needs some good news after its recent share price battering while pub groups will likely be celebrating whatever the result of the Euro 2024 final on Sunday.

In the US there isn’t much in the way of economic data but we will get earnings results from Bank of America, Morgan Stanley, BlackRock, Goldman Sachs, Johnson & Johnson, Netflix, Taiwan Semiconductor Manufacturing and American Express.

It should be an interesting week of earnings and hopefully a steady CPI reading in the UK. More from us on Wednesday with a market update.

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