European assets extended Monday’s losses as jitters over political upheaval in France continued.
The euro edged lower on Tuesday after hitting the weakest level in a month the day before. The benchmark stock index weakened for a third day while 10-year French bonds traded at their highest yield compared to similar German debt since October 2023.
The yield on 10-year securities jumped five basis points to 3.27%, widening the spread over equivalent German bonds 63 basis points, the highest since October 2023 on a closing basis.
Regional markets are being hit by the fallout from the European Parliament election, with French President Emmanuel Macron calling a legislative vote to halt the advance of his far-right rivals. The election slated later this month risks becoming the ultimate showdown over Macron’s trademark economic policies, which had largely reassured investors since he took office in 2017.
The shock move is negative for the country's credit score, warned Moody's on Monday. The agency's Aa2 rating is a notch above Fitch and S&P Global's scores.
"This snap election increases risks to fiscal consolidation," said Moody's in a statement. "Potential political instability is a credit risk given the challenging fiscal picture the next government will inherit."
See also: IMF raises global economic growth forecast on stronger US demand
Fed decision on June 12
Investors are also preparing for the likelihood of another volatile session Wednesday with both the latest monthly print for US consumer prices and Fed decision due.
While policymakers are widely expected to keep borrowing costs on hold, there’s less certainty on officials’ rate projections. A 41% plurality of economists expect policymakers to signal two cuts in their “dot plot”, while an equal number expect the forecasts to show just one or no cuts at all, according to the median estimate in a Bloomberg survey.
See also: Poland offers T-bills first time since Covid-19 to shore up budget
“Even if we just get one cut this year, I think we’re just cashing out,” BlackRock global chief investment strategist Wei Li told Bloomberg TV. “The equity market can take it because we really focusing on the earnings and growth piece, which has been driving equities rather than rates this year.”
US stock futures dipped after both the S&P 500 and Nasdaq 100 extended their record-rallies in the previous session. The 10-year Treasury benchmark dropped about 4 basis points.
