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 on a Federal Reserve rate hike helped cushion broader market sentiment as investors looked to Wall Street for direction.
Brazilian stocks were set to rally after right-wing Senator Flavio Bolsonaro outperformed poll predictions in the first round of the presidential election and advanced to a runoff against
leftist incumbent Luiz Inacio Lula da Silva.
In Europe, the pan-regional STOXX 600 index rose 0.5% by 1135 GMT, although Paris shares fell to six-month lows and euro zone blue chips were unchanged.
S&P 500 and Nasdaq futures were down 0.1%.
Anthilia portfolio manager Giuseppe Sersale said investors were in wait-and-see mode ahead of Wall Street, with Chinese markets closed for a holiday and scant US data due.
"France continues to be the theme debated in Europe this morning. The euro is down another half a percent, spreads are widening and French stocks are underperforming," he said. "For now we are nervous but not excessively negative".
A Brazilian exchange-traded fund jumped 15% in Frankfurt, while the Brazilian real was set to strengthen against the dollar as Bolsonaro's lead raised hopes of a more business-friendly policy agenda.
FRANCE WEIGHS ON THE EURO
Spanish stocks largely shrugged off Prime Minister Pedro Sanchez's call for an early election next month, with Madrid up 0.4%. Sersale said investors saw little reason to worry about Spain's finances while economic growth remains solid.
The euro recovered some ground to trade at $1.1202 after falling by as much as 0.8% to a 17-month low of $1.1160.
The single currency, down about 2.5% last month, has come under pressure as investors fret over 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 German debt surged above 150 basis points on Friday, fuelling concerns of broader contagion across European markets.
"France is the real deal in terms of risk premia for the euro," said Saxo strategist Neil Wilson, noting that government plans to reduce the budget deficit still face parliamentary scrutiny and could ultimately be watered down.
French 10-year yields stayed below Friday's peak of 4.993%, last broadly unchanged at 4.8642%, while Spanish yields added 1.6 basis points, and German yields were also little changed.
The euro's slide lent fresh support to the dollar, which also drew strength from elevated Treasury yields. The dollar index rose 0.3% to 102.217.
Sterling eased almost 0.2% to $1.3219, while the yen held broadly steady at 157.93 per dollar.
While expectations of a Fed pause could weigh on the dollar, "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.
Benchmark 10-year US Treasury yields were unchanged at 5.2771%, while two-year yields slipped 1.3 basis points to 4.8122%.
Still, borrowing costs across major economies remain near multi-year highs as deteriorating public finances, heavy debt issuance and elevated energy prices continue to pressure bond markets.
FED REPRICING OFFERS SUPPORT
Trading was thin in Asia due to holidays in China and South Korea as well as in Australia's New South Wales state, though regional markets took their cue from Wall Street's gains on Friday after weaker-than-expected US labour data.
Figures released last week showed US job growth slowed more than expected in September and payrolls for the previous two months were revised sharply lower, prompting investors to largely rule out a Federal Reserve rate increase this month.
Japan's Nikkei rose 2.4% and MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.2%.
Investors now see an 18% chance of a Fed rate increase this month, down from 64% a week ago, according to CME FedWatch data, though a move in December remains largely priced in.
Oil prices edged higher in volatile trade as concerns about potential supply disruptions linked to the US-Israeli war on Iran were balanced by the impact of rising Middle East exports and a Group of Seven pledge to boost supplies.
Brent crude futures added 0.3% to $102.59 a barrel, while US crude dropped 0.6% to $90.53.
Spot gold rose 0.4% to $4,160.3 an ounce.
(Reporting by Danilo Masoni and Rae Wee; Editing by Edwina Gibbs, Kim Coghill and Susan Fenton)
