Storm from Washington to Paris: why markets avoided panic over political risks

The week that ended was marked by political turbulence: in the US, the independence of the Federal Reserve was in question, and in France, the stability of the government. It would seem that such events should have caused a sharp reaction of the markets. But instead of panic investors chose caution. J.P. Morgan experts believe that uncertainty does increase volatility, but the fundamentals of the markets have a margin of safety.

Earlier this week, Donald Trump announced that he had decided to resign Lisa Cook, one of the Fed governors whose mandate runs through 2038. The occasion was the accusations of allegedly falsifying mortgage documents prior to her appointment. Cook denies the allegations, and her lawyer calls the president's actions illegal.

Cook was appointed to the Fed's Board of Governors by the Democratic administration, not Trump. An attempt to remove her is perceived as a political move that could change the balance of power in the regulator's leadership. In the long run, it also calls into question the future of Chairman Jerome Powell, whose term expires in 2026. Taken together, Trump's initiative could lead to the politicization of Fed decisions - from the pace of rate cuts to long-term inflation targets.

The main risk for markets lies not so much in personalities, but in undermining confidence in the institution itself. The Fed's independence has traditionally been considered a key factor of stability, and the attempt of direct intervention by the president puts it in doubt. J.P. Morgan emphasizes that this could lead to a weakening of inflation expectations. But, analysts say, history shows that the Fed's institutional mechanisms and legal protections have already helped it maintain its independence - even under intense political pressure.

Political tensions have reached a new level in France. Prime Minister François Bayrou put the government to a confidence vote after his 44 billion euro budget reform plan, a combination of spending cuts and tax hikes, met with sharp opposition. Virtually all parties said they would vote against it.

The likelihood of Bayrou's defeat is high, analysts at J.P. Morgan said. In the event of a no-confidence vote, he would have to resign. That would put President Emmanuel Macron before a difficult choice: appoint a new minority government that would prove equally fragile, or take a risk and call early parliamentary elections. Either option threatens further uncertainty over governance, budget negotiations and fiscal reforms.

The situation is important for the markets because France is the second economy in the eurozone and one of the largest issuers in European indices. Increased political instability could put pressure on the overall sentiment of European investors.

That said, there are offsetting factors in the region - rising defense spending and budget support from Germany should support corporate profits and partially mitigate political risks.

The markets reacted to the increased political risks with caution rather than panic. European and US stocks showed moderate declines, the dollar weakened, while gold, on the contrary, strengthened. In the US, the yield curve flattened slightly, reflecting a shift in monetary policy expectations. The most notable changes came in France, with government bond yields OAT rising against German Bunds and the CAC 40 index sagging.

These dynamics indicate that investors are pricing in increased uncertainty, but do not view what is happening as the beginning of a systemic crisis. The focus remains on key risk indicators - from short-term rates and inflation expectations to the term premium on long-term bonds and the dollar exchange rate.

Political events in the U.S. and France reminded investors that external factors can sharply increase fluctuations in the markets. However, the underlying prospects remain stable: J.P. Morgan notes that U.S. assets continue to demonstrate stability, and European stocks retain the potential for growth in the medium term.

For investors, this is a signal to focus on portfolio protection and resilience rather than short-term news. Allocating investments across different regions, sectors and currencies, and using bonds and real assets as a backstop, helps mitigate the impact of political risks. "We remain optimistic and confident that long-term trends will prove stronger than short-term shocks," the bank's analysts conclude.

This article was AI-translated and verified by a human editor