*

Europe's STOXX up 1%, French bond yields edge down

*

French first-round vote result reduce chances of fiscal

splurge

*

Investor focus turns to Fed June meeting minutes

(Updates for European Market open)

By Lawrence White

LONDON, July 1 (Reuters) - French stocks drove a broader

rally in European shares on Monday and bond yields fell as the

far right took a smaller lead in the first round of France's

election than some expected, suggesting a hung parliament could

result and hamper the party's agenda.

The election 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 European Commission to recommend

disciplinary steps.

On Monday, the euro was 0.41% higher while the

Paris CAC 40 index jumped 2.7%, driving a 1% rise in the

regional STOXX 600 benchmark on news of far-right

National Rally leader Marine Le Pen's historic gains.

French 10-year government bond prices edged

up, pushing yields down by about 2 basis points to 3.272%, which

helped narrow the gap between French 10-year debt and its German

equivalent in a sign of cooling concerns over French finances.

"There is a sense of relief that the first round of the

French elections weren't as comprehensively in Le Pen's favour

as the polls indicated," said Tony Sycamore, market analyst at

IG.

"This raises hopes that the National Rally won't win an

outright majority, nor be in a position to open the purse

strings, a proposition which had the French bond market and the

euro looking nervously over their shoulders."

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 the eurosceptic,

anti-immigrant RN winning power next week will hinge on the

political dealmaking by its rivals over the coming days.

The focus now shifts to the July 7 runoff and will depend on

how parties decide to join forces in each of France's 577

constituencies for the second round, and could still result in a

majority for RN.

"Investors are concerned that if the (RN) wins a majority,

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 hovered in flat territory in a

subdued start to the second half of the year, having risen 7% so

far in 2024.

MACRO SPOTLIGHT ON FEDERAL RESERVE

China stocks were mixed, with blue-stocks closing

up 0.5% and the Shanghai Composite index up 0.9% after

positive manufacturing data from a private survey contradicted

an earlier official report.

Factory activity among smaller Chinese manufacturers grew at

the fastest pace since 2021 thanks to overseas orders, while

weak domestic demand and trade frictions led to another

industrial sector contraction.

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 but 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, the CME FedWatch tool showed.

Investor focus this week will be on the minutes of the Fed's

June meeting that will offer more clues on the central bank's

thinking before the spotlight switches to payrolls data on

Friday. The Fed in June projected just one rate cut in 2024.

Among currencies, the yen traded slightly weaker

at 161.06 per dollar after skidding to 161.27 on Friday, its

weakest level since late 1986, keeping traders on edge for signs

of intervention from the Japanese authorities.

A quarterly central bank survey showed on Monday the

business mood in Japan's service sector soured in June, while a

rare unscheduled downgrade to the country's GDP data also showed

the economy shrank more than reported in the first quarter.

In commodities, oil prices edged higher, with Brent futures

0.73% higher at $85.62 per barrel and U.S. West Texas

Intermediate crude futures up 0.76% at $82.16.