The Fed takes center stage

MARKET LINES Markets extended their relief yesterday as easing tensions in the Middle East continued to weigh on oil prices. Renewed hopes for negotiations between Washington and Tehran pushed Brent crude below $90 per barrel, allowing government bond yields to retrace as investors unwound part of the geopolitical risk premium built up over recent weeks. Attention now turns to the Federal Reserve, which takes center stage today. While markets continue to assign a modest probability to another rate hike, the baseline scenario remains unchanged: the Fed is expected to keep policy rates on hold. Softer June inflation data, together with early signs of moderation in the labor market, have given policymakers greater flexibility to wait for additional evidence before considering further tightening. Beyond the policy decision itself, investors will focus on Kevin Warsh's press conference, where any shift in the Fed's assessment of inflation risks or signals on the expected policy path could quickly reshape rate expectations. After the relief provided by improving geopolitical conditions, today’s Fed meeting is set to become the key catalyst for financial markets over the coming weeks.

► Euro rates continued to ease, driven by the decline in oil prices, which led markets to scale back their expectations for monetary tightening by the ECB. The market is now pricing in only about 22 bps of hikes in September and 40 bps by year-end.

► The curves exhibited a bull steepening pattern, with the decline in yields being more pronounced at the front end. The 10-year Bund returned to around 3.11%, while the 10s30s EUR swap steepened to10 bps.

► Sovereign spreads remained broadly stable, with the 10-year BTP-Bund spread near 80 bps and the OAT-Bund spread around 78 bps. Markets continue, however, to monitor the French risk premium, as OATs remain valued at levels close to those of Italy.

► The DXY edged lower to 101.29, weighed down by disappointing US consumer confidence data.

► EUR/USD gained 0.26% to 1.1396, supported by dollar weakness. Sterling also slightly underperformed against the euro, with EUR/GBP rising 0.15% to 0.8564.

► The Norwegian krone and the Swedish krona, high-beta currencies, underperformed the euro, with EUR/NOK rising 0.54% to 11.0458 and EUR/SEK gaining 0.20% to 11.0376.

► Europe closed higher for a third consecutive day, with the STOXX 600 up +0.35%, driven by a strong earnings day and geopolitical tailwinds. The FTSE 100 (+0.8%) outperformed.

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► Defensives and consumer names led (+3% for Consumer Staples, with the Unilever/Coca-Cola earnings). On the downside, Techs (semiconductors -3.4% vs software +5%), Energy and Utilities dropped.

► Same rotation out of mega-cap tech in the US: the S&P 500 equal-weight hit an all-time high, while the Nasdaq underperformed (with significant intraday stress). The chip selloff deepened on two fronts: AI spending sustainability concerns and signs of progress in China's advanced chipmaking capabilities.

► Tightening of iTraxx indices (-0.4 bps for the Main, -1.9 bps for the X-Over). Philips underperformed (+1.4 bps on the 5-year CDS) versus the Main following results that slightly disappointed (-4.8% for the stock at yesterday's close) on the order book and costs (helium in particular).

► Despite raising its 2026 targets, which led to a +4.6% rise in Orange's share price yesterday, the telecom operator's spreads remained unchanged in the 4-7 year range and even widened slightly for its hybrid debts (+3 bps on average).

► The pressure remains strong on the Tech sector, with a further widening of SpaceX's 5-year CDS by 10 bps to 185 bps (all-time high), similarly for Oracle (+5 bps to 217 bps) and especially CoreWeave (+65 bps), with SoftBank suffering by contagion (+20 bps on the EUR hybrid 2062c32 bond).

► France: French Household confidence has continued to recover in July: the Insee…