European markets were captured in an indecisive trading pattern yesterday, in the wake of the surprise win of the left alliance in the French elections. Spreads of France (and other peripheral EMU countries) initially tightened marginally as none of the extreme parties secured a majority to implement uncontrolled spending. However, from a longer term perspevtive, the fiscal situation in most semi-core and peripheral countries remains challenging. Today most intra-EMU spreads (including of France) again (partially) reversed yesterday’s tentative narrowing (France +2 bps vs Bunds, Spain & Belgium also +2 bps) . The European fiscal premium is here to stay (cf infra). In technical trading, German yields added between 1.5 bps (2-y) and 2.5 bps (30-y). At least for now, investors stay cautious to push for a more aggressive pricing on further ECB interest rate cuts (September not yet fully discounted). US markets in the meantime almost fully discount two 25 bps Fed rate cuts toward the end of the year in the wake of recent softer price and labour market data. In this respect markets at least expect some opening from Fed Chair Powell at the hearing before the Senate Banking Committee that recent data, if confirmed, might give the Fed more confidence to cut rates earlier than what was guided by the June Fed dots (one 25 bps cut this year, four next year). At the time of writing, no text of Powell’s appearance is available yet. US yields are are rising marginally (< 2.0 bps) going into Powells’ hearing. European equities remain in the defensive (EuroStoxx 50 -0.9%). US equities (S&P +0.2%, Nasdaq + 0.35%) are holding near/at record levels.
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