This week in the markets: EU uncertainty

Investors would be advised to hold on to their hats this week as markets digest big gains for far-right parties in the weekend’s European Union’s Parliamentary elections, and the Federal Reserve updates on progress towards interest rate cuts.

Stock markets across Europe opened sharply lower on Monday as results from the weekend’s European Parliament elections emerged. Exit polls suggested a firm shift to the right with euro-sceptic and anti-immigration parties taking seats - notably in France, Germany and Austria. The results pushed President Emmanuel Macron to call a snap general election in France which will take place at the end of June. That has only added to the uncertainty.

The markets reacted negatively this morning. The Euro Stoxx 50 index fell by more than 1%, while the DAX in Germany dipped 0.7% and the French CAC 40 was 1.7% lower. The euro also fell against most currencies.

It is still expected that a coalition lead by the centre-right European People’s Party bloc will continue to hold power in the EU, but with reduced scope to deliver on its agenda.

In the UK, the FTSE 100 was also lower but avoided the worse falls seen on the continent - it dipped 0.4% on opening. The S&P 500 will open later after posting gains last week. It has risen almost 1% in the past 5 days of trading and remains close to its all-time high.

That was despite strong jobs numbers which pushed back expectations for cuts to interest rates. American employers added 272,000 jobs in May, the US Labor Department said, above expectations of 185,000 new roles. The strength of the US economy has meant there is less pressure on the Federal Reserve to lower rates. US rate-setters have been cautious in their commentary, warning that inflation remains a problem.

The Fed will meet on Wednesday this week and a June cut is not expected. The odds of a cut in July are getting longer as well. The narrow consensus is that September may be when the first reversal in rate policy comes, but even that is not certain. The chances of a December cut being the first have jumped to 40% according to market watchers.

That is a long way from how the year began - with four cuts expected and some even predicting six Fed cuts this year.

Despite the more hawkish backdrop, the stock market has continued to perform well. Let’s not forget that a strong economy should mean higher company earnings, even if monetary policy remains tighter for longer.

There will be more news relevant to central banks when UK labour market numbers are released on Tuesday, ahead of April GDP numbers on Wednesday. The Bank of Japan will also announce latest rates policy on Friday with no change expected.

Elsewhere in the world, Indian shares have shaken off their own election jitters, after Prime Minister Narendra Modi eventually returned to office at the head of a coalition government. A bigger win for Modi had been expected but the result of the Indian election last week was much closer than many - including markets - predicted. Indian shares have enjoyed a stellar run in 2024 but fell sharply when the first results emerged. They have now regained their upward path, even if Modi’s investment-led agenda now looks less certain.

In other news affecting investors here in the UK, the main political parties are expected to unveil their election manifestos this week. Labour is currently expected to win and has vowed to not increase the major taxes affecting voters. That means no rises to Income Tax, VAT or National Insurance.

Other taxes exist, however, and it is not yet clear how the party might approach the current freeze on Income Tax thresholds. The freeze - while not technically a tax rise - has dragged more of worker’s wages into higher tax bands, raising billions for the Treasury.

One area where there appears to more certainty is the Lifetime Allowance for pensions. It was recently removed by the government, but Labour had threatened to reimpose the limit. It has now backtracked from that.

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