This week in the markets: European shares fight back and UK rate call due

Interest rates in the UK and further fallout from EU elections last week were the focus for investors as the week got underway.

Markets were generally steady in Europe on Monday morning. The Euro Stoxx 50 rose 0.76% in early trading to recover some of the ground lost last week. Nonetheless, it is still around 3% below its level prior to the results of European Parliament elections eight days ago, when Eurosceptic and anti-immigration parties scored big gains.

Markets have reacted negatively to the prospects of more protectionist political leadership in Europe. And particularly in France, which returned significantly more far-right MEPs to Strasbourg and which will now vote in national polls after President Emmanuel Macron called a surprise general election.

The right-wing National Rally party narrowly leads in the polls and the outcome of the vote, which begins on June 30, is highly uncertain.  That uncertainty has been felt in both French share and bond markets. The CAC40 index of leading French shares suffered its worst week since March 2022 last week, while French government bonds have also been falling. The margin between 10-year interest rates on French and German bonds last week reached its biggest spread since 2017.

That is potentially a problem in the single-currency bloc, leading to some speculation that the European Central Bank could intervene to support French government bonds. That is not currently on the agenda, however, as confirmed in anonymous briefing by ECB policymakers to Reuters.

In the UK, the FTSE 100 rose in early trading but was about level by mid-morning on Monday. The attention for UK investors this week will be the Bank of England, which meets to decide interest rates on Thursday. No change is expected but markets will be looking for any indication that the Bank will, or will not, follow through with a rate cut in September. That’s what markets are currently expecting.

• Read more about when interest rates will fall

There will be further data to help them make that judgement on Wednesday this week when UK inflation data is due. A further fall is expected, bringing the headline rate of price rises back down to the Bank of England’s 2% target - somewhere it hasn’t been in almost three years.

If that happens it will mean rates sitting some 3.25% above the level of inflation. That’s good news for cash savers but will only add to the pressure on the Bank to relieve the strain on indebted households.

Rates in the US were held last week, despite inflation there falling by slightly more than expected. That has firmed up expectations that one rate cut will be enacted later this year. Comments from Fed officials this week have anchored December as the expected month.

Elsewhere in the world, Asian markets have suffered a bumpy start to the week after China reported its factory output slowed in May and with its property market still showing signs of stress.

Chinese Factory output fell 5.6% in May, the government there reported, which was below analysts' forecasts. Retail sales rose just 4.1% in the first five months of the year. Meanwhile, property investments fell 10% in May from a year earlier, while home prices in major Chinese cities fell 3.2% and property sales plunged 30.5% year-on-year.

Also in focus this week is oil, which has been gaining in price for around two weeks. A barrel of Brent Crude has risen from around $78 on June 7 to $83 today. The backdrop for oil has been improving, mainly thanks to rising forecasts for demand as the summer progresses.

That’s it for today - have a great week.

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