Euro pummelled by France's debt burden; stocks mixed

By Rae Wee SINGAPORE, Oct 5 (Reuters) - Asian stocks made brisk gains on Monday as investors pared back expectations of a Federal Reserve rate hike this month, while the euro sank to a 17-month low on concerns over France's deteriorating fiscal position. The euro tumbled more than 0.8% to $1.1161 in Asia, before paring some of those losses to trade at $1.1178. The common currency, which lost roughly 2.5% last month, has come under pressure due to mounting worries about high debt levels and political gridlock in France ahead of next year's presidential election.

The premium investors demand to hold French 10-year bonds over safer Germany shot above 150 basis points on Friday, stoking concerns of a broader spillover across European markets. "We're starting to see some cracks in overall euro sentiment," said Bart Wakabayashi, branch manager at State Street in Tokyo, as a generally positive mood on the euro zone and an outlook for rate hikes have quickly darkened. "Real money are selling euro against the dollar very aggressively," he said.

French OAT futures were down 0.23%, while German bund futures edged up 0.1%. The euro's slide gave the dollar an extra lift, adding to support from elevated US Treasury yields and pushing the greenback up 0.5% against a basket of currencies to 102.39. . Sterling slipped 0.23% to $1.3207, while the yen fell 0.15% to 158.10 per dollar.

"Tighter policy elsewhere and a growing case for an October Fed pause are US dollar headwinds. But US growth outperformance and strong foreign appetite for US securities keep US dollar risks skewed to the upside," said Elias Haddad, global head ​of markets strategy at BBH. Bonds, meanwhile, held steady, with benchmark 10-year US Treasury yields retreating slightly to 5.2686% while two-year yields stood at 4.8101%. [US/] Still, yields across major economies remain near multi-year highs as bond prices come under pressure from deteriorating government finances, a glut of issuance and elevated energy costs.

A trader, who declined to be identified as they were not authorised to speak to the media, said clients have expressed reluctance to buy US Treasuries unless there was a "material improvement" in the Middle East war. OCTOBER FED HIKE OFF THE TABLE Trading was thin in Asia with holidays in China, South Korea and Australia's New South Wales, though equity markets took their cue from Wall Street's moves on Friday. Data last week showed US job growth slowed more than expected in September and the nonfarm payrolls count for the prior two months was revised sharply lower, which investors believed would almost take another rate hike from the Fed this month off the table.

That helped Japan's Nikkei rise 2%, while MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.9%. Nasdaq futures were flat while S&P 500 futures eased 0.1%. EUROSTOXX 50 futures and DAX futures inched down, though FTSE futures tacked on 0.26%.

"Labour conditions are stable overall, but Friday's downward revisions signal that the US economy has lost jobs in two out of the nine months year to date, and the risk of further employment losses means that the Fed can't hike another 100 basis points from here, which is what the curve is pricing in," said Jose Torres, senior economist at Interactive Brokers. Investors are now pricing in less than a 20% chance that the Fed could raise rates this month, as compared to a 64% chance a week ago, according to the CME FedWatch tool. But traders still expect a hike in December.

In Brazil, markets are expected to jump later in the day after it became clear that Brazilian Senator Flavio Bolsonaro will face President Luiz Inacio Lula da Silva in the runoff of a presidential election, doing better than expected in the first round of voting. Elsewhere, oil prices edged lower as rising Middle East crude exports and a release of oil stocks by the Group of Seven nations boosted supplies, offsetting concerns about further damage to Gulf oil infrastructure amid the US-Israeli war on Iran. Brent crude futures were down 0.5% at $101.75 per barrel while US crude slid 0.9% to $90.29 a barrel. [O/R} Spot gold fell 0.24% to $4,132.33 an ounce. [GOL/] (Reporting by Rae Wee; Editing by Edwina Gibbs and Kim Coghill)

Source: Euronext Markets