By Ankur Banerjee

SINGAPORE (Reuters) -Asian stocks were subdued on Monday as traders pondered the U.S rates outlook, while the euro rose after the first-round voting in France’s shock snap election was won by the far-right, albeit with a smaller share than some polls had projected.

The shock vote has unsettled markets as the far-right, as well as the left-wing alliance that came second on Sunday, have pledged big spending increases at a time when France’s high budget deficit has prompted the EU to recommend disciplinary steps.

On Monday, the euro was 0.32% higher, while European stock futures rose 1% and French OAT bond futures gained 0.15% as investors digested the better than feared results, although uncertainty remained.

Exit polls showed Marine Le Pen’s National Rally (RN) winning around 34% of the vote, comfortably ahead of leftist and centrist rivals but the chances of eurosceptic, anti-immigrant RN winning power next week will depend on the political dealmaking by its rivals over the coming days.

“Perhaps the result isn’t as bad as the market had feared,” said Michael Brown, senior strategist at Pepperstone.

“We’ve also seen a lot of rhetoric form other parties looking to perhaps pull out candidates to try and avoid the National Rally winning seats in the runoff next Sunday … The market may be taking a little bit of solace in that.”

The focus now shifts to next Sunday’s runoff and will depend on how parties decide to join forces in each of the country’s 577 constituencies for the second round, and could still result in a majority for RN.

“Investors are concerned that if the far-right National Rally party wins a majority in the French Parliament, this could set the stage for France to clash with the EU, which could disrupt Europe’s markets and the euro sharply,” said Vasu Menon, managing director of investment strategy at OCBC.

In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.07% higher, to kick off the second half of the year having risen 7% so far in 2024. rose 0.57%.

China stocks eased, with blue-stocks down 0.45%. Hong Kong’s was flat.

A private sector survey on Mondayshowed China’s manufacturing activity grew at the fastest pace in more than three years due to production gains, even as demand growth slowed.

The Caixin/S&P Global manufacturing PMI data contrasted with an official PMI released on Sunday that showed a decline in manufacturing activity.

On the macro side, the spotlight remains on if and when the Federal Reserve will start cutting rates in the wake of data on Friday showing U.S. monthly inflation was unchanged in May.

In the 12 months through May, the PCE price index increased 2.6% after advancing 2.7% in April. Last month’s inflation readings were in line with economists’ expectations. They remain above the Fed’s 2% target for inflation.

Still, markets are clinging to expectations of at least two rate cuts from the Fed this year with a cut in September pegged in at 63% probability, CME FedWatch tool showed.

U.S. stocks on Friday ended lower after an early rally fizzled. [.N]

Among currencies, the yen traded around 160.98 per dollar after the government, in a rare unscheduled revision to gross domestic product (GDP) data on Monday, said Japan’s economy shrank more than initially reported in the first quarter.

Data also showed Japan’s factory activity stayed unchanged in June amid lacklustre demand and as companies struggled with rising costs due to the weak yen.

The yen skidded to 161.27 on Friday, its weakest level since late 1986, keeping traders on edge as they look for signs of intervention from Japanese authorities.

The euro touched a more than two week high of $1.076175 in early Asian hours, pushing the , which measures the U.S. unit against six rivals, a touch lower at 105.59.

In commodities, oil prices edged higher, with futures 0.39% higher at $85.33 per barrel and U.S. West Texas Intermediate crude futures up 0.42% at $81.88. [O/R]

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One data point is enough to show how French President Emmanuel Macron’s snap election gamble went spectacularly wrong. In the first round of parliamentary elections in 2022, 4.2mn French people voted for the far-right Rassemblement National party; on Sunday, that number was around 11mn, according to estimates by pollster Ipsos.

Thanks to Macron’s miscalculations, the eurosceptic, anti-immigration RN has a shot at securing an absolute parliamentary majority in the second round of voting on July 7 — with potentially disastrous consequences for social cohesion and for France’s place in Europe. 

Macron dissolved parliament without consulting the leaders of the three parties in his centrist Ensemble alliance. Defying all conventional political wisdom, he did so when the RN already had huge momentum after its resounding victory in European parliament elections on June 9. He ordered a lightning campaign of only three weeks, giving precious little time for his ill-prepared allies to undermine the RN’s credibility on the economy and other issues.

Macron called the elections betting that the rancorous relations among France’s leftwing parties would prevent them from forming a common electoral front — which would have allowed his centrists to leapfrog them into the second round in hundreds of seats. Within four days, the four left parties agreed an electoral pact and a radical tax-and-spend programme.

Macron’s alliance has been crushed. It looks likely to lose as many as two-thirds of its seats, according to Ipsos. It is fracturing as its political heavyweights begin to position themselves for the post-Macron era and the presidential election in 2027. Macron’s authority has been shredded and whatever the outcome of the second round, his role is set to change dramatically. There will be no more hyperactive president running the country from the Elysée palace.

Macron called the election saying France needed a moment of political “clarification”. It says everything that the best outcome the president can probably now expect is a hung parliament, political gridlock and a caretaker prime minister with no mandate. In these circumstances, the populist “fever” that he hoped to break may only get worse, with the RN clamouring for an early presidential election to bring order and stability back to the country.

The RN is not assured of an absolute majority in the second round. Party leader Marine Le Pen avoided any triumphalism on Sunday night, warning that victory was not secure. The RN’s strategy now is to play up the threat to France from, as Le Pen put, a “far left with violent tendencies”.

Whether the RN forms the first far-right government since the Vichy regime during the second world war will depend on its opponents uniting against them. But the so-called “republican front” has been deployed so many times by Macron, cynically his critics would say, to block the far right that it is now tattered and battered.

The highest turnout in decades has produced hundreds of three-way constituency contests for the second round. To block the far right, the left and Macron’s centrists will need to work together, pulling out of three-way races where the other is better placed to beat the RN but also explicitly calling on their supporters to vote for the other camp where their candidate is not present.

Co-operation is so far partial at best. Jean-Luc Mélenchon, leader of the far-left La France Insoumise (LFI), made the first concession on Sunday night, saying the leftwing bloc would pull out of contests where it qualified in third place to favour Macron’s alliance. The centre-left and the greens had already said they would do so. The trouble is in more conservative districts, where it may be the third-placed centrists who are better placed to beat the RN.

After Mélenchon’s move, Macron’s Ensemble alliance said it too would stand down third-placed candidates in favour of those “in a position to beat the RN and with whom we share the essential: the values of the republic”. It implies its tactical withdrawals will be done selectively.

Édouard Philippe, the leader of Horizons, the liberal-conservative wing of Ensemble, meanwhile, urged voters to spurn both far-right and far-left parties.

Macron’s camp and the left will come under pressure to do more to bolster the republican front in the coming days. This will be hard to swallow for a president who has treated the far left and far right as equally bad for France.

Millions of voters will now have to wrestle with an invidious choice at the ballot box on July 7: between a far right dangerously close to power and a leftwing bloc under the glowering influence of the far-left Mélenchon. After Macron’s reckless wager, there is no alternative.

The epic rally in shares of tech behemoths is far outpacing their profits, and it could mean the S&P 500 is looking more vulnerable, according to Apollo Global Management chief economist Torsten Sløk.

In a note on Sunday, he pointed out that the top 10 companies in the S&P 500 account for 35% of the index’s market value but only 23% of its earnings.

“This divergence has never been bigger, suggesting that the market is record bullish on future earnings for the top 10 companies in the index,” Sløk wrote. “In other words, the problem for the S&P 500 today is not only the high concentration but also the record-high bullishness on future earnings from a small group of companies.”

Apollo Global Management

Because the S&P 500 is weighted by market cap, soaring share prices of Big Tech companies rushing into the AI boom has meant that recent gains are concentrated into just a handful of stocks, obscuring the relative mediocrity for rest of the index.

Before Nvidia began its selloff earlier this month, the AI chip leader accounted for more than a third of the S&P 500’s rally this year.

“Such a high concentration implies that if Nvidia continues to rise, then things are fine,” Sløk warned on June 12. “But if it starts to decline, then the S&P 500 will be hit hard.”

As market leadership becomes more concentrated, so are investors’ portfolios, especially as putting money in funds that track indexes becomes increasingly popular.

Bank of America analysts said in a recent note that the average large-cap fund has 33% of its portfolio in its top five holdings, up from just 26% in December 2022.

Similarly, the share of funds the have more than 40% of their portfolio in their top five holdings has jumped to 25% from less 5% in December 2022.

Meanwhile, Wall Street analysts have been bullish on the S&P 500 and are scrambling to raise their year-end targets. Even one of the biggest bears has surrendered and is now one of the most bullish analysts.

And Fundstrat Global Advisors cofounder Tom Lee recently said the S&P 500 could hit 15,000 by the end of the decade. He isn’t the only Wall Street bull making bold predictions.

Ed Yardeni has been pounding the table about another “Roaring Twenties” super-cycle and has said the S&P 500 would jump to 6,000 by next year. By the end of the decade, he said the stock index could reach 8,000.