The bond market is enduring a rough patch, with conditions worsening notably this Monday afternoon (since precisely 3:30 p.m.). German Bund yields are climbing by 7.5 basis points to 2.875%, French OATs by 6.3 points to 3.597%, and Italian BTPs by 8 points to 3.578%. Yet, equity indices are behaving as if nothing is amiss, despite these being the worst levels observed since September 25.
The day started poorly in Japan, where the 10-year bond hit 1.97%, the 20-year reached a historic high at 2.95%, and the 30-year stood at 3.395%.
How these two universes--rates and equities--remain so disconnected is a mystery. The Paris stock market has gone nowhere since the opening bell, with the CAC 40 (-0.08%) closing the session around the 8,100-point pivot (at 8,108 points), extending a lack of initiative that has characterized the past nine sessions (stagnating around the 8,100 threshold since November 26).
Reflecting increased investor caution after a successful 2025 trading year so far, the Paris market moved within a particularly narrow trading range last week, between 8,040 and 8,160 points, with fluctuations consistently limited to between -0.1% and 0.4%.
This lack of momentum is mirrored on Wall Street, where the major indices have posted only marginal gains over the past six sessions (+0.1% for the S&P 500 last week), though this has brought them back within sight of their all-time highs, with the Nasdaq less than 2% from its peaks.
This Monday, the Nasdaq slipped by 0.2%, the Dow Jones by 0.3%, and the S&P by 0.2%--a clear reflection of the wait-and-see attitude ahead of the Federal Reserve's statement expected in 48 hours.
Barring an enormous surprise, nothing appears likely to alter expectations of another 25-basis-point cut in U.S. borrowing costs, given recent signs of a slowdown in employment and improved control over inflation trends.
This would bring the total monetary easing by the U.S. central bank since September 2024 to 1.75 basis points--a move unprecedented in the United States outside of recessionary periods, and with inflation still above the Fed's target.
Yet, over the past 10 days, while the FedWatch barometer anticipates an 85-90% probability of a rate cut, yields have continued to deteriorate: T-Bonds are up 4.8 points to 4.188%, and the 2-year is up 4.2 points to 3.606%. These are the same levels seen in mid-November, when a third rate cut seemed unlikely for December 10.
Even if this move seems largely priced in, a rate cut accompanied by dovish messaging could boost interest in risk assets at year-end--a seasonally favorable period for equities--potentially paving the way for the famous "Santa Claus rally."
Some analysts believe it is not entirely impossible for the S&P 500 to hit the symbolic 7,000-point mark by December 31, before possibly heading toward 7,500 points in early 2026--a major psychological target cited by many strategists.
Once the Fed meeting concludes, attention will inevitably turn to 2026, a year set to be marked by the arrival of a new Fed chair. The frontrunner is Kevin Hassett, the longtime economic advisor to President Donald Trump, though he has not yet been officially appointed.
Equity markets generally welcome rate cuts, but the prospect of an even more dovish policy from the institution--with a new leader known for his accommodative approach--could begin to unsettle some market participants.
The recent spate of rate cuts could place the still-resilient U.S. economy at risk of overheating, which might force the Washington-based institution to pause or even reverse course by raising rates again--potentially triggering a new recession, some specialists warn.
"We see good reasons for the Fed to start showing more caution and to slow down its rate cuts," predicted Henry Alle, market analyst at Deutsche Bank, last week.
Meanwhile, the news flow looks much quieter on the economic indicators and corporate earnings front, although Oracle's quarterly results, scheduled for Wednesday evening, will be closely watched.
The software maker's shares soared nearly 40% after its last earnings release, following the disclosure of a massive cloud order book driven by strong AI investments. However, the stock has since lost all those gains amid questions about the sustainability of the exceptional cycle that has propelled U.S. tech for the past three years.
The dollar is up 0.15% against the euro at 1.1620, while the Swiss franc continues to slide, losing 0.25% against the euro to 0.9392--its lowest level in a month.
