Let's start with the much-anticipated monetary policy meeting of the US Federal Reserve. The central bank is reclaiming the narrative and distilling a speech in line with expectations. While the central scenario hinges on a single rate cut, the much-anticipated dot plot, which gauges each committee member's position on the trajectory of interest rates, leaves the door open to two rate cuts between now and the end of the year. Especially if inflation continues to fall more than expected. CPI Core inflation came in 0.1 points below expectations, at +0.2% in monthly terms.

Following this release, indices rose sharply against a backdrop of easing interest rates, a falling dollar and a rising gold price. However, the day after the decision, European indices took a nosedive. Was the French President to blame? No, not this time (though?), but we'll come back to that later.

Graph1

Graph: Bloomberg Opinion

The chart above shows the movements of the four main financial assets on June 12. While the CPI was clearly well received, the markets failed to maintain their initial trends. The dollar and bond yields gradually recouped some of their losses, pushing equity indices lower in the next day's European session.

In Europe, the situation became somewhat tense following the European elections. France was the worst performer, with a very right-wing vote and a surprise dissolution of the National Assembly. The Paris market's performance relative to its peers had already been deteriorating for months, as shown in the chart below.

Graph 2

Whatever it takes

The spread between French and German yields has jumped 25 basis points in the space of a few days. In other words, investors are worried about France's future, and are making it pay more for its debt issues. Nature abhors a vacuum, but investors don't like (un)pleasant surprises. The timing of the deal has also come at the worst possible time, following the downgrading of French debt by Standard & Poor's.

Graph 3

Source : Bloomberg

The chart above shows weekly spread trends over the last 15 years. As you can see, the situation was already much worse, particularly during the euro fears of 2011 and 2012. At that time, it took all the determination of Super Mario Draghi and his famous "whatever it takes" to calm the ardor of speculators.

While the current situation is much more localized, it nonetheless reflects investors' mistrust of France, while also weighing on public finances. With resistance at 63/65 overrun, now acting as a first support, the spread has continued to diverge and is currently testing resistance at 74/76, with the risk of peaking at 86 before the next elections. And depending on the results, the 110/112 zone could be the next target.