The bond market is enduring a rough patch, which sharply worsened this Monday afternoon (since precisely 3:30 p.m. Paris time): Bund yields jumped by 7.5 basis points to 2.875%, French OATs rose 6.3 points to 3.597%, and Italian BTPs climbed 8 points to 3.578%. Yet, stock indices behaved as if nothing was amiss, despite these being the worst levels seen since last September 25.
The day started poorly in Japan, with 10-year yields at 1.97%, 20-year bonds hitting a historical high of 2.95%, and 30-year yields at 3.395%.
How can the two worlds of rates and equities remain so disconnected today? It remains a mystery. The Paris stock exchange went nowhere from the opening bell, with the CAC 40 index down just 0.08% to close around the pivotal 8,100 mark (at 8,108 points), extending the lack of momentum that has characterized the past nine sessions (stagnating around 8,100 since November 26).
Reflecting greater caution from investors after a successful 2025 for equities so far, the Paris market traded within an exceptionally narrow range last week, oscillating between 8,040 and 8,160 points, with fluctuations consistently limited to between -0.1% and 0.4%.
Wall Street has shown a similar lack of direction over the past six sessions, with major indices posting marginal gains last week (+0.1% for the S&P 500), which nonetheless brought them back within sight of all-time highs, with the Nasdaq less than 2% from its peak.
This Monday, the Nasdaq slipped 0.2%, the Dow Jones fell 0.3%, and the S&P 500 dropped 0.2%--a good summary of the wait-and-see attitude ahead of the Federal Reserve's statement expected in 48 hours.
Barring a major surprise, nothing seems likely to alter expectations for another 25-basis-point cut in U.S. interest rates, given recent signs of a slowdown in the labor market and better control over inflation trends.
Such a move would bring the total monetary easing by the U.S. central bank since September 2024 to 1.75 percentage points--an unprecedented pace outside of recessionary periods, and with inflation still above the Fed's target.
Yet, despite the FedWatch barometer predicting an 85-90% chance of a rate cut over the past ten days, yields have continued to deteriorate: T-Bonds are up 4.8 points to 4.188%, and the two-year yield is up 4.2 points to 3.606%--the same levels as mid-November, when a third rate cut seemed unlikely for December 10.
Even if largely priced in, a rate cut accompanied by a dovish message could boost appetite for risk assets at year-end, a typically favorable period for equities, potentially paving the way for the famous "Santa Claus rally."
Some analysts believe it's not entirely impossible for the S&P 500 to reach the symbolic 7,000-point mark by December 31, before targeting 7,500 in early 2026--a major psychological milestone cited by many strategists.
Once the Fed meeting is over, attention will inevitably turn to 2026, a year that will see a new Fed chair take office, expected to be Donald Trump's trusted economic advisor, Kevin Hassett, though he has not yet been officially appointed.
Historically, equity markets favor rate cuts, but the prospect of an even more accommodative policy under a new chairman known for his dovish stance could start to worry market participants.
The recent spate of rate cuts could place the resilient U.S. economy at risk of overheating, which could force the Washington-based institution to pause or even hike rates again, potentially triggering a renewed recession, some experts warn.
"We see good reasons for the Fed to start exercising more caution and slow its rate cuts," forecasted Henry Alle, market analyst at Deutsche Bank, last week.
On the economic front, the news flow looks much quieter, with few key indicators or corporate results expected, though Oracle's quarterly earnings, due Wednesday evening, will be closely watched.
The software giant's stock soared nearly 40% after its last report, buoyed by a massive cloud order backlog thanks to strong AI investment, but has since lost all those gains amid questions about the sustainability of the exceptional tech cycle that has driven U.S. markets for the past three years.
The dollar is up 0.15% against the euro to 1.1620, while the Swiss franc continues to slide, losing 0.25% versus the euro to 0.9392, its lowest in a month.
