Some significant events and economic data are poised to dominate market movements this week. Firstly, the outcome of the EU Elections is expected to shape equity market trends across the eurozone and impact the single currency. Additionally, the Fed is scheduled to decide on the interest rate, a pivotal event for global markets, following the European Central Bank’s rate cut last week.
Europe
After the European stock market reached a record high last week, the outcome of the EU Parliamentary elections can be considered a pivotal factor impacting businesses in the euro area. This, in turn, will shape various sectors, particularly EV makers, fossil fuel producers, green energy companies, defence and industrial firms, and major banks.
The rise of far-right parties in the European Parliament could negatively impact green stocks such as TotalEnergies, Iberdrola, Électricité de France SA (EDF), Engie, Fortum Corp, Ørsted, Vestas, Acciona SA, and Enel Green Power S.p.A. Notably, the renewable energy index is down 11% this year, while the Euro Stoxx 600 has risen by 9%.
Furthermore, carmakers including Renault, Porsche, Volkswagen, Audi, Mercedes, Citroën and BMW may experience volatility amid any policy changes around emission limits based on the Green Deal. Generally, these carmakers may benefit from growing support for the radical right due to costly green transition targets.
Defence and industrial firms could also be negatively impacted, as populist parties tend to be anti-war, pro-Russia, and EU sceptics. The focus will be on stocks such as Rheinmetall, Saab AB, and Rolls-Royce Holdings Plc.
The banking sector is a tricky one as a majority of the EU banks reported positive earnings in the first quarter, with the Euro Stoxx Banks Index up 21% this year. The discussion around a joint deposit insurance policy could bring uncertainties and pressure on these big lenders’ shares.
Lastly, the euro may face downside pressure amid uncertainties and potential right-wing parties’ influence on the single market.
The US
The Fed’s rate decision will be a pivotal event for the global market, as the central bank’s policy is seen as a leading indicator for its Western peers. Additionally, the country is set to release its inflation data for May ahead of the Fed’s policy meeting on Thursday.
The headline Consumer Price Index (CPI) of the US rose 3.4% year on year in April, down from 3.5% in March. Consensus forecasts that inflation will stay the same at 3.4% for May. However, the level is still well above the Fed’s target level of 2%. Hence, it is widely expected that the bank will hold the interest rate at between 5.25% and 5.5% this week. On a positive note, the core CPI, which excludes food and energy, cooled to 3.6% year-on-year, the lowest since April 2021, signalling a favourable trend in the country’s inflation trajectory. Although the Fed is unlikely to lower the interest rate this week, markets believe that a rate cut could be on the table in September.
Investors will closely watch the FOMC’s projection for its policy path, known as the Dot Plot diagram, which reflects the future rate trajectory. It is worth noting that Chair Jerome Powell’s speech at the press conference typically has more impact on market movements than the Fed’s decision itself. A hawkish stance tends to pressure equity markets and lift the US dollar, while a dovish stance tends to have the opposite effect.
Asia Pacific
The Bank of Japan’s (BOJ) policy meeting is the most influential event for Asian markets, typically impacting the Japanese Yen. The BOJ is scheduled to decide on its interest rate this Friday, with expectations that the bank will keep the policy rate unchanged at 0.1%. However, a sharp devaluation of the Yen pressures the BOJ to further tighten its monetary policy. Consensus suggests that the bank may decide to trim its government bond purchase and potentially raise its interest rate in July. This could cause the Yen to strengthen against other major currencies, as the move contrasts with actions taken by other central banks.
Furthermore, China will report its CPI and PPI for May, which is seen as an important indicator of the country’s economic trajectory. In contrast to the Western world, the country has been experiencing deflationary pressure since 2023 due to its restricted Covid-10 curbs. Recent data showed that China’s consumer price increased for three consecutive months in April. Further growth in inflation will offer a positive sign to the global economy, considering China’s role as both a major good supplier and consumer market.
