Volatile bonds, a confidence crunch and the ECB meets

Two types of story dominated the chatter in the newsroom this week.

The watercooler favourite? The antics of high-profile CEOs, with the departure of Nestle’s boss over an undisclosed affair with a subordinate and the resignation of Suntory’s CEO over the possible purchase of illegal substances both causing a stir in the London and Singapore newsrooms.

But what kept the news desks busiest was bond market volatility, which could well spill over into next week. Over the last few days, we’ve had a slew of guests sharing their views on some of the most significant yield moves seen in the U.K. gilt market and across Europe in decades.

And more could be to come next week…

At the epicenter of European bond yield uncertainty is France.

On Monday, there will be a confidence vote in the government, called by Prime Minister Francois Bayrou — and the ruling party is almost certain to lose.

Rivals France Insoumise, National Rally and the Socialist Party have all claimed they will vote against the government. This raises the prospect of President Emmanuel Macron calling a snap election, although it is more likely he will seek to assign another centrist caretaker government.

In a straw poll of clients, Nomura found that yields of French government bonds — or OATS — would need to move even more dramatically to cause a “major loss of international investor confidence.” In a note, the bank pointed to the next rating review of France’s sovereign debt by Fitch, due to take place on Sept. 12, as a key date to watch.

Another inflection point this week will come when the ECB meets on Thursday amid the heightened market volatility.

The central bank is expected to keep rates on hold at 2%, with HSBC predicting President Christine Lagarde will maintain a “dovish bias.” The ECB itself stressed the need to stay “deliberately uninformative about future interest rates decisions” in its July account of its policy meeting.

Market watchers expect Lagarde to be questioned about the uncertainty in France during her press conference, but economists predict she will avoid answering directly.

Monday: German trade data

Tuesday: French Industrial Production data

Thursday: U.S. Inflation data

Friday: German Inflation data, U.K. GDP data