Stocks Fall as French and Fed Tensions Hit Risk Sentiment

Risk sentiment took another hit after Trump revived trade tensions, warning of new tariffs and export controls targeting advanced technology and semiconductors. The proposed measures aim to retaliate against digital services taxes imposed by foreign governments on U.S. tech giants.

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This escalation comes as stocks and bonds were already losing momentum following a brief optimism sparked by Fed Chair Jerome Powell’s Jackson Hole remarks. That optimism faded Monday amid renewed doubts about the pace of monetary easing ahead of a key inflation report later this week, which is expected to underscore persistent price pressures.

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“While questions about the Fed’s independence are serious, markets remain primarily focused on the anticipated September rate cut rather than the Cook controversy,” said Andrea Tueni, head of sales trading at Saxo Banque France.

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Regarding French politics, Tueni added, “The next big development would be French 10-year yields surpassing those of Italy. That would clearly signal a return of the risk premium on French assets.”

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For now, Fed swaps are pricing in an 80% probability of a quarter-point cut next month, with traders expecting at least one additional cut before year-end.

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Trump’s push to remove Cook is seen as an attempt to gain greater influence over monetary policy. If successful, it would give him a four-person majority on the seven-member Fed Board of Governors. Cook’s current term runs until 2038, making her a key figure in shaping the central bank’s long-term direction.

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Trump claimed he had “sufficient cause” for termination, citing allegations that Cook made false statements on one or more mortgage applications. Cook, notably the first Black woman to serve on the Fed Board, has strongly denied the claims.

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“Bond investors aren’t pleased with Trump’s continued interference in Fed matters and what it means for the central bank’s independence,” wrote Russ Mould, investment director at AJ Bell. He added that the effort to oust Cook “will fuel speculation that Trump intends to install a policymaker aligned with his views.”

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Cook pushed back against the move, asserting that the president lacks authority to fire her and she will not resign. Her attorney, Abbe Lowell, stated they are prepared to take “all necessary actions” to block Trump’s “illegal attempt.” The Fed has so far declined to comment on the matter.

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Despite the day’s turbulence, markets remain fixated on two key themes: the trajectory of interest rates and the outlook for monetary policy independence. With a pivotal inflation report and heightened political drama on the horizon, investors should brace for more volatility in the days ahead.

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