Stocks fall as French, Fed turmoil hit risk mood: Markets Wrap

by Andre Janse van Vuuren and Julien Ponthus

Traders shunned risk as European stocks and US equity futures fell, pressured by political turmoil in France and US President Donald Trump’s bid to oust Federal Reserve Governor Lisa Cook.

Europe’s Stoxx 600 retreated 0.7% after French Prime Minister Francois Bayrou called a confidence vote that could bring down his government as soon as next month. France’s CAC 40 index tumbled 1.8%, the most in three weeks. The yield premium on French 10-year bonds over German peers widened two basis points to 77 basis points, the most since April.

In the US, S&P 500 futures slipped 0.1% as Trump’s threatened action against Cook raised fresh concerns over the central bank’s independence. Longer-dated Treasuries declined, steepening the yield curve, as the 10-year rate advanced two basis points to 4.30%. Gold rose 0.3%. The dollar dropped as much as 0.3% before paring the loss.

Risk appetite received a further knock after Trump renewed his trade brinkmanship, threatening fresh tariffs and export restrictions on advanced technology and semiconductors in retaliation against digital services taxes abroad. 

Stocks and bonds were already under pressure after optimism that followed Fed Chair Jerome Powell’s address at Jackson Hole faded on Monday. Doubts about the pace of easing are lingering ahead of an inflation report later this week, expected to highlight sticky price pressures.

While question marks over the Fed’s independence are worrisome, “markets are really focused on the expected September rate cut rather than Cook,” said Andrea Tueni, head of sales trading at Saxo Banque France. As for France, “the next big step would be the yield on French 10-year bonds topping those of Italy. I see this as a blatant comeback of the risk premium on French assets.”

For the Fed, swaps imply about an 80% chance of a quarter-point rate cut next month, with at least one more expected by year-end.

Forcing out Cook would give Trump an opportunity to secure a four-person majority on the Fed’s seven-member Board of Governors. Her term wasn’t set to expire until 2038. Trump said he had “sufficient cause” to fire Cook, the first Black woman to serve on the Fed Board in Washington, based on allegations that she made false statements on one or more mortgage loans.

“Bond investors aren’t happy about how Trump continues to meddle with the Fed and threatens its independence,” wrote Russ Mould, investment director at AJ Bell. The move to oust Cook “will drive speculation that the US president will push for a replacement governor more in line with his way of thinking.”

Cook said Trump has no authority to fire her, and she won’t quit. Cook’s lawyer, Abbe Lowell, said they plan to take “whatever actions are needed to prevent” Trump’s “illegal action.” The Fed declined to comment. 

What Bloomberg strategists say:

“Risk sentiment will falter further thanks to a barrage of Trump headlines hitting markets that were already shaky. Now, the Fed’s credibility is under the spotlight after Trump sought to remove Lisa Cook. That move signals a wider shakeup may be possible if policymakers fall out of step with the White House. The long end and the US dollar will suffer as Fed independence — long seen as sacrosanct — comes under increasing strain.”

—Mary Nicola, MLIV.

Corporate News:

• Brevan Howard Asset Management is set to hand a minority stake to Abu Dhabi’s Lunate in a milestone agreement for the macro-trading firm that turned the emirate into its biggest risk center in just a year after setting up a local office.
• Orsted A/S executives are working to reassure shareholders Tuesday after the Trump administration’s decision to halt one of the company’s two wind-power projects in the US raised questions about the viability of its proposed $9.4 billion stock sale.
• Indonesia’s newly established sovereign wealth fund has sounded out investors on a plan to raise $3.1 billion by selling so-called patriot bonds at below-market yields, people familiar with the matter said.

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 0.7% as of 10:06 a.m. London time
• S&P 500 futures fell 0.1%
• Nasdaq 100 futures fell 0.1%
• Futures on the Dow Jones Industrial Average fell 0.2%
• The MSCI Asia Pacific Index fell 1%
• The MSCI Emerging Markets Index fell 0.9%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.1625
• The Japanese yen rose 0.2% to 147.56 per dollar
• The offshore yuan was little changed at 7.1622 per dollar
• The British pound was little changed at $1.3466

Cryptocurrencies

• Bitcoin rose 0.5% to $110,167.84
• Ether rose 1.6% to $4,424.58

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.30%
• Germany’s 10-year yield declined three basis points to 2.73%
• Britain’s 10-year yield advanced five basis points to 4.74%

Commodities

• Brent crude fell 1% to $68.09 a barrel
• Spot gold rose 0.3% to $3,376.96 an ounce

This story was produced with the assistance of Bloomberg Automation.

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