French political turmoil and Federal Reserve turmoil, global stock markets fell, long-term debts rose, and the US dollar recovered most of its lost territory

# Source: Wall Street CN

U.S. President Trump’s move to remove Federal Reserve Governor Lisa Cook has thrust the Fed’s independence into the spotlight. However, as Cook explicitly stated that she will not resign, the market’s initial reaction has moderated.

On August 26th, declines in European stocks widened. France’s Prime Minister announced that a government confidence vote would be held on September 8th, causing France’s 10-year government bond yield to jump 9 basis points on Monday and the French CAC 40 Index to fall by more than 2%. The U.S. dollar recovered most of its losses, while gold gave back some of its gains. Nevertheless, nervousness still lingered, with Asian stocks dropping 0.7%. Investors’ doubts about central bank independence led to sell-offs in long-term U.S. Treasuries, steepening the yield curve.

- European stocks saw deeper declines: the French CAC 40 Index fell over 2%, the Euro Stoxx 50 Index dropped 1.2%, Germany’s DAX Index declined 0.85%, and the UK’s FTSE 100 Index slid 0.8%.

- Japan’s Nikkei 225 Index closed down 1% at 42,394.40. Japan’s TOPIX Index closed 1.1% lower at 3,071.99. South Korea’s KOSPI Index closed 1% down at 3,179.36.

- The U.S. Dollar Spot Index fell 0.1%.

- The Euro rose 0.2% to $1.1638.

- Japan’s 10-year government bond futures dropped to their lowest level since 2009.

- Losses on U.S. 30-year Treasuries widened, with yields rising 5 basis points to 4.94%.

- Japan’s 10-year government bond yield was flat at 1.615%.

- French government bonds and stocks have been sold off for two consecutive days, and the yield spread between France’s 10-year government bonds and Germany’s 10-year government bonds widened to its highest level since April.

- Bitcoin rose 0.7% to $110,354.61.

- Spot gold climbed 0.3% to $3,375.68 per ounce.

## France’s Prime Minister Announces Government Confidence Vote, Fueling Market Jitters

In terms of geopolitics, France’s political crisis has also impacted the market. French Prime Minister François Bayrou announced that a government confidence vote would be held on September 8th. This move, aimed at advancing a €44 billion fiscal austerity plan, has triggered market concerns about political uncertainty.

Affected by this, French government bonds and stocks have been sold off for two consecutive days. The yield spread between France’s 10-year government bonds and Germany’s 10-year government bonds has widened to its highest level since April, highlighting a surge in the market’s risk premium.

Japan’s 10-year government bond futures fell to their lowest level since 2009.

European stocks extended losses: the French CAC 40 Index dropped over 2%, the Euro Stoxx 50 Index fell 1.2%, Germany’s DAX Index declined 0.85%, and the UK’s FTSE 100 Index slid 0.8%.

Wall Street’s initial optimism about a Fed rate cut has faded, as traders prepare for potentially disappointing inflation data later this week. The market widely expects that the core personal consumption expenditures (PCE) price index— the Fed’s preferred inflation gauge, which excludes food and energy— may have risen 2.9% year-on-year last month, marking the fastest annual increase in five months.

## Fed Independence Takes Center Stage

The core impact of Trump’s move lies in shaking the market’s long-term belief in the Federal Reserve’s independence. If he succeeds in removing Cook, Trump will have the opportunity to secure a majority of four seats on the Fed’s seven-member Board of Governors, potentially allowing him to exert direct influence on future monetary policy. Cook’s term was originally set to end in 2038. Losses on U.S. 30-year Treasuries widened, with yields rising 5 basis points to 4.94%.

Rodrigo Catril, Strategist at National Australia Bank in Sydney, said:

“The removal of Cook has heightened concerns about the Fed’s independence. If Trump succeeds, it would mean he could have four board members aligned with his views. It remains to be seen whether these members will respect the Fed’s independence and adhere to its dual mandate.”

Risks to the Fed’s independence have also been warned by credit rating agencies. When S&P Global Ratings affirmed the U.S. AA+ rating earlier this month, it noted that political developments are a potential risk factor. A report including contributions from analyst Lisa Schineller stated:

“If political developments put pressure on the strength of U.S. institutions, the effectiveness of long-term decision-making, or the Fed’s independence, the rating could also come under pressure. This, in turn, could jeopardize the U.S. dollar’s status as the world’s primary reserve currency— a key credit strength.”

## Disclaimer

The views expressed in this article are solely those of the author and do not constitute investment advice from this platform. This platform makes no guarantees regarding the accuracy, completeness, originality, or timeliness of the information contained herein, nor shall it be liable for any losses arising from the use of or reliance on such information.