Fed rate cut optimism lifts stocks sentiment, eyes on French and Japanese politics

By Ankur Banerjee and Alun John

SINGAPORE/LONDON (Reuters) - Stocks rose and Treasury yields held lower on Monday after last week's dismal U.S. labour data sealed the case for an interest rate cut this month, with investors preparing for a week heavy on politics, crucial data and central bank activity.

U.S. S&P 500 futures were up about 0.2%, leaving the index set to head back towards the record intraday high hit following last week's jobs data, while European and Asian shares were up 0.2% and 0.7%, respectively.

The first political drama of the week took place in Japan, where the yen and longer-dated bonds fell and stocks rose following the resignation of Prime Minister Shigeru Ishiba, as traders bet heightened political uncertainty would make the Bank of Japan less likely to raise rates in the near term. [JP/]

Attention is turning to who will replace Ishiba, and whether it could be an advocate of looser fiscal and monetary policy such as Liberal Democratic Party veteran Sanae Takaichi, who has criticised the BOJ's interest rate hikes.

Meanwhile, France could be forced to look for its fifth prime minister in three years as the incumbent Francois Bayrou faces a confidence vote on Monday that he is expected to lose.

The selloff in French assets after Bayrou called the vote last month has eased, and French stocks and bonds were slightly outperforming European peers on Monday.

But uncertainty about whether President Emmanuel Macron would try to appoint another prime minister or call fresh parliamentary elections if Bayrou loses means French and wider European assets are not yet out of the woods.

A slew of upcoming French debt rating reviews are also on investors' radar.

DOLLAR HELD IN CHECK

The political uncertainty in France and Japan is also keeping the dollar in check - even after last Friday's soft jobs data, which has left markets fully pricing in a 25 basis point rate cut from the Fed later this month, and showing a small chance of a 50 basis point cut.

The numbers raise "the question as to whether US employment conditions are now shifting from cooling to deteriorating and if the Fed should cut rates faster," said Paul Mackel, global head of FX research at HSBC.

He said this had "opened the door" for the dollar to weaken again, but with "political noise around the yen and euro, the likelihood of dollar weakness will be reflected more easily against other currencies".

The dollar hit a six-week low against a basket of currencies on Friday after the jobs data.

On Monday, while it was down markedly on the Swiss franc, and Antipodean currencies, the euro was just 0.1% higher at $1.1731 and the dollar was even a touch higher on the yen at 147.6 yen.

U.S. Treasury yields dropped sharply on Friday but were last steadier, with the benchmark 10-year yield marginally softer on the day at 4.08% and the rate sensitive two-year yield at 3.50%.

U.S. CPI data due on Wednesday will be the last major data point before the Fed's meeting, and a hot print could temper bets on a super-sized rate cut.

The European Central Bank meets on Thursday, but is expected to hold rates steady for a second straight meeting.

In commodities, gold continued to surge, hitting its latest all time high of 3,616 an ounce. The precious metal is up 37% this year after rising 27% in 2024. [GOL/]

Oil prices climbed after the OPEC+ group agreed over the weekend to raise output at a slower pace from October on expectations of weaker global demand. Brent crude and U.S. West Texas Intermediate crude rose 1.6% each. [O/R]

(Reporting by Ankur Banerjee in Singapore and Alun John in London; Editing by Jamie Freed, Shri Navaratnam and Helen Popper)