By Danilo Masoni and Rae Wee
MILAN/SINGAPORE, Oct 5 (Reuters) - Concerns over France's fiscal position pushed the euro to a 17-month low on Monday and weighed on French assets, though easing bets of a Fed rate hike this month supported broader markets.
The pan-European STOXX 600 index rose 0.3% by 0844 GMT, though Paris' benchmark index fell 0.9% to a fresh six-month low.
Spain's Prime Minister Pedro Sanchez called an early election next month, in a bid to strengthen his mandate following the rejection
of the government's key housing decrees. Initial market reaction, however, was subdued as the decision was not unexpected, with Spanish yields inching up 1 basis point (bps).
Shares in Asia gained and U.S. futures were steady.
In Brazil, stocks were expected to jump after it became clear that right-wing Senator Flavio Bolsonaro will face leftist President Luiz Inacio Lula da Silva in a presidential runoff after outperforming expectations in the first round of voting.
A Brazilian exchange-traded-fund in Frankfurt jumped 15%.
The euro fell 0.8% to a 17-month low of $1.1160 overnight before recovering some ground to trade at $1.1208.
The single currency, down about 2.5% last month, has come under pressure as investors fretover France's rising debt and political gridlock 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.
"France is the real deal in terms of risk premia for the euro," said Saxo strategist Neil Wilson, noting that the government's plans to reduce the budget deficit still face a parliamentary process and could be watered down.
"The move in French bond yields and spreads shows the market does not have faith the government will carry out the required fiscal reform."
On Monday, French 10-year OAT yields added 6 bps to 4.9196%, while the equivalent German yields fell around 1 bps to 3.4466%.
The euro's slide gave the dollar an extra lift, adding to support from elevated U.S. Treasury yields and pushing the greenback up 0.3% to 102.194.
Sterling slipped around 0.1% to $1.3233, while the yen was broadly steady at 157.91 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 U.S. dollar risks skewed to the upside," said Elias Haddad, global head of markets strategy at BBH.
Benchmark 10-year US Treasury yields retreated by around 1 bps to 5.2686% while two-year yields stood at 4.7975%, down 1.5 bps. [US/]
Still, yields across major economies remain near multi-year highs as bond prices come under pressure from deteriorating government finances, a glut of debt issuance and elevated energy costs.
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 in the region took their cue from Wall Street's gains on Friday.
Data last week showed U.S. job growth slowed more than expected in September and the nonfarm payrolls count for the prior two months was revised sharply lower, leading investors to all but rule out another Fed rate increase this month.
That helped Japan's Nikkei rise 2.4%, while MSCI's broadest index of Asia-Pacific shares outside Japan gained 1.2%.
Nasdaq futures and S&P 500 futures were both down less than 0.1%.
"Labour conditions are stable overall, but Friday's downward revisions signal that the U.S. 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 an 18% chance that the Fed could raise rates this month, compared with a 64% chance last week, according to the CME FedWatch tool. Traders still expect a hike in December.
Elsewhere, oil prices edged lower as rising Middle East crude exports and a release of oil stocks by 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 0.8% at $101.39 per barrel while US crude slid 1.4% to $89.84 a barrel. [O/R]
Spot gold rose 0.5% to $4,162.9 an ounce. [GOL/]
(Reporting by Danilo Masoni and Rae Wee; Editing by Edwina Gibbs, Kim Coghill and Susan Fenton)
