European stock markets showed a slight increase at the start of the day. The Eurostoxx rose by 0.5%, Germany’s DAX went up by 0.4%, and France’s CAC 40 increased by 0.6%. The UK’s FTSE had a smaller rise of 0.1%, while Spain’s IBEX dropped by 0.1%, and Italy’s FTSE MIB gained 0.4%. In France, Finance Minister Éric Lombard is urging for budget compromises, especially with Bayrou facing a confidence vote on September 8. Meanwhile, the bond market is still struggling, with 30-year yields hitting 4.50% in France and 4.99% in the US. If US yields surpass 5%, there could be more instability. The current calm in the market may not last long if rising yields push investors toward safer assets.

Bond Market Pressure

We are seeing a slight rally in stocks, but the bond market has deeper issues. The US 30-year yield is nearing the 5% mark, which last caused significant stress in late 2023. If it breaks above this level, we could see another wave of selling in stocks, making this small bounce look unstable. The upcoming French confidence vote on September 8 is creating uncertainty, noticeable in bond spreads. The difference between French and German 10-year bond yields—a key risk indicator—has widened to over 75 basis points, indicating serious investor concern. We should think about buying inexpensive, out-of-the-money puts on the CAC 40 index as a hedge against a negative political outcome. This temporary stock market calm has lowered volatility indicators, making protection cheaper. The VSTOXX index, which tracks Euro Stoxx 50 volatility, is around 18, much lower than the panic levels seen during previous crises. This is a good chance to buy call options on volatility or VSTOXX futures before next week’s vote.

Economic Data and Rate Implications

The main issue is stubborn inflation, with the latest August 2025 data for the Eurozone at 2.8%, still above the ECB’s target. This suggests that central banks are unlikely to cut rates soon, which will keep upward pressure on yields. Traders should consider options on interest rate futures to prepare for a “higher for longer” rate environment that will continue to impact the market. Create your live VT Markets account and start trading now.

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