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Global Markets Rattled by Europe Political Jitters: Markets Wrap

(Bloomberg) — A selloff in European assets amid heightened political risk weighed on trader sentiment around the globe, with investors also positioning for this week’s Federal Reserve decision.

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Stocks and bonds dropped across the board after French President Emmanuel Macron called a legislative vote in the wake of a crushing defeat in the European Parliament elections. Yields on France’s 10-year government debt hit their highest level this year, while shares in the nation’s top banks tumbled almost 10%. The euro led losses in developed-world currencies.

NY Fed: “Short-Term Inflation Expectations Decline Slightly”

The vote risks becoming the ultimate showdown over Macron’s trademark economic policies, which had largely reassured investors and businesses since he took office in 2017. In particular, plugging holes in the budget will become even more challenging if he loses control over parliament and the government.

“The growing uncertainties in Europe have those markets from across the pond trading lower this morning in a material way,” said Matt Maley at Miller Tabak + Co. “Although it’s hard to decipher what it will mean for the global economy and global markets over the near-term, it does raise uncertainties about the longer term.”

The S&P 500 hovered near 5,340. Nvidia Corp. began trading after a 10-for-one stock split. Apple Inc.’s developers conference will show whether the iPhone maker can become a major player in the burgeoning field of artificial intelligence.

Treasury 10-year yields rose three basis points to 4.46%. The dollar climbed 0.3%.

Investors are also positioning for Wednesday’s Fed decision.

“The interest-rate guessing game goes on,” said Chris Larkin at E*Trade from Morgan Stanley. “Even the friendliest inflation numbers probably won’t push the Fed to act any sooner than September.”

After Friday’s solid jobs report, traders pulled back on rate-cut expectations, pricing in the first full 25 basis points of easing in December — rather than November.

The central bank — led by Chair Jerome Powell — is widely expected to hold borrowing costs steady for a seventh consecutive meeting, but there’s less certainty on officials’ rate projections.

A 41% plurality of economists expect the Fed to signal two cuts in the closely watched “dot plot,” while an equal number expect the forecasts to show just one or no cuts at all, according to the median estimate in a Bloomberg survey.

“The release of a new ‘dot plot’ outlining Fed projections for the path of rates will be the top focus,” said Jason Pride and Michael Reynolds at Glenmede. “For fixed income investors, the Fed’s more patient higher-for-longer approach is likely to keep bond yields elevated as inflationary pressures remain.”

Whether it’s another move up or a dive down, traders are bracing for added volatility wrought by Wednesday’s dual macroeconomic catalysts: a report on consumer prices in the morning and the Fed’s rate decision in the afternoon.

The options market is betting the S&P 500 will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser at Citigroup Inc. Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023, he added.

Investors remain too optimistic about the timing of a Fed-rate cut, according to RBC Capital Markets strategists led by Lori Calvasina.

The benchmark index could drop to 4,900 points if the Fed holds rates at current levels, inflation proves stickier than expected and the 10-year Treasury yield remains below 5%, the strategists wrote in a note.

If the central bank were to cut rates as expected, but earnings came in below projections, the S&P 500 would trade around 5,100 points — about 5% lower than current levels, Calvasina said. And the third — bearish — scenario sees the benchmark slumping almost 16% if stubborn inflation results in Fed rate hikes.

“The equity market has had a terrific year, but there is a current pause in the rally as the Fed comes into question,” said David Donabedian at CIBC Private Wealth US. “There is a real chance if the economy does not slow down there will be no rate cut this year.”

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Read More: Global Markets Rattled by Europe Political Jitters: Markets Wrap

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