Waiting for the results of today’s parliamentary elections at the ECB, having on the table all scenarios for the next day. The common recommendation of the ECB’s analyses is that the result of the elections in France will be a decisive factor in how the French and wider European bond market will behave from tomorrow (8.7.2024), although there is optimism that the worst possible will not be verified. The next day to find France in a state of government, a possibility that would send strong signals of uncertainty to markets for the course of the French economy and the decision-making capacity to reduce the budget deficit, which is expected to range this year between 5-5.% of GDP and debt that has exceeded 100% of GDP. That is why Europe is waiting with a cut breath for the result of the ballot box, since a strong message of uncertainty from them could upset the markets, sparking large waves of turbulence in European bonds and stock exchanges. Defence Line In any case, the ECB is ready to react by stating officials with knowledge of the discussions and decisions taken at the Central Bank staff. Since the pandemic, the ECB has created a special defence tool, the Transmission Protection Instrument (TPI) which enables direct intervention with markets in countries under great pressure. This tool is ready to be used by the ECB, if necessary, from Monday when “attacks” occur on French bonds or a wider domino turbulence occurs on the European bond market. Frankfurt’s “defence line”, as assured by ECB officials, may be activated, if necessary, for all countries from the largest to the smallest, which are usually under the greatest pressure on such turbulence. New interest rate reductions The situation on the bond market, in the wake of the French elections, will certainly be examined at the ECB monetary policy board on 18 July. The other major issue is interest rate policy. At the moment there is no question of a further reduction in them, after the fall in June. However, the links to the ECB staff indicate that the policy of deescalation of interest rates will continue with a more likely decision on a reduction in September and December if market conditions and inflation allow. With regard to inflation, which is also the determining factor in the policy of reductions, the estimates reached Frankfurt are encouraging. They show that it is declining in Europe and the USA allowing greater flexibility in central bank movements. In any case, however, as intersecting ECB factors requires great attention in the next steps. Source: RES – ICM