This week, two key events had a major impact on the global financial environment, which entered a state of stagnation in light of this scenario: diplomatic advances related to the conflict in Ukraine, as well as the Federal Reserve Chairman’s highly anticipated speech at Jackson Hole. Combined, these factors have generated concern and caution in global bond and foreign exchange markets, where every political or economic signal is quickly reflected in expectations, whether regarding risk or investment strategies. Learn more about this topic.
Understand more about the possible developments in the securities markets
Euro zone government bonds were in a holding pattern on Tuesday as traders looked ahead to a symposium of global central bankers later in the week, and after talks in Washington on ending Russia’s war in Ukraine. NATO Secretary General Mark Rutte told Fox News on Monday that U.S. President Donald Trump’s meeting with Ukrainian President Volodymyr Zelenskiy and other European and NATO partners had been very successful.
In a social media post late on Monday, Trump said he had called Russian President Vladimir Putin and begun arranging a meeting between Putin and Zelenskiy, to be followed by a trilateral summit among the three presidents. However, questions remain on security guarantees and whether a ceasefire or peace agreement is the best way forward.
Germany’s 10-year bond yield DE10YT=RR, the euro zone benchmark, was down about 1 basis point (bp) at 2.763%. It hit a 4-1/2 month high of 2.787% on Monday. Yields move inversely with prices. Germany’s two-year yield DE2YT=RR, which is sensitive to changes in interest rate expectations, was steady at 1.968%. “The easy explanation for the inactivity in the market today is that we don’t know about progress in the Ukraine talks,” said René Albrecht, analyst at DZ Bank.
What are the expectations about the Fed?
Federal Reserve Chair Jerome Powell is due to speak at the Kansas City Fed’s annual symposium in Jackson Hole, as money market traders stick with their bets for a rate cut next month. Futures imply around an 85% chance of a quarter-point rate cut at September 16-17 meeting, little changed from the day before. The Fed’s policy rate has been in the 4.25%-4.50% range since December.
The size and importance of the U.S. economy means changes in Fed rate expectations often influence European and other bond markets. Expectations for European Central Bank interest rates remain well-anchored in the near term, with markets expecting the central bank to remain on hold in September.
Italy’s 10-year bond yield IT10YT=RR was down 1 bp at 3.584%, keeping the spread between Italian and German 10-year yields unchanged at 82 bps. The gap between Italian and French 10-year yields FR10IT10=RR continues to narrow, last at about 13.5 bps.
European scenario: fiscal adjustments and political risks
There is a stable interest rate environment in the European bloc, coupled with a French budget package. This creates political uncertainty that could affect risk perception in sovereign debt markets. The need for such significant cuts is being analyzed by investors, as it could increase domestic opposition, hindering the implementation of reforms.
France’s Prime Minister Francois Bayrou unveiled his 2026 budget plan in July that included almost 44 billion euros ($51.39 billion) of cuts. The budget is likely to draw resistance from opposition Socialist lawmakers when parliament returns from recess next month, putting Bayrou’s government at risk of being toppled.
Exchange rate volatility and trade movements
Geopolitical factors and monetary expectations have converged, keeping markets cautious. In both Europe and Asia, we can see that investors have been waiting for clearer signals before taking firmer positions. Jerome Powell’s speeches at Jackson Hole and the developments in these negotiations surrounding the war in Ukraine could be decisive in determining the direction of global assets in the short term.
GCN.com/Reuters