European bonds showed mixed yields amid fiscal concerns over France; equities fell, led by STOXX 600. Brent crude rose 2.85% on Middle East geopolitical tensions.

European bond markets had a mixed week, with yields falling sharply in Germany, France, and the UK, while Italy and Spain saw slight increases. The Franco-German 10-year spread widened to 72.7 basis points amid broadening risk premiums, as markets digest the EU’s proposed rearmament plans and their implications for fiscal balances. French bonds came under particular pressure, with two-year yields now exceeding those of Spain, Italy, and even Greece—a rare inversion for a core Eurozone economy. Investors are pricing in heightened fiscal risk as France’s debt burden surpasses 113% of GDP and structural deficits remain elevated, prompting warnings from the IMF and looming credit downgrades. Despite recent ECB rate cuts, short-term French bonds are trading below their peers, reflecting growing investor unease. Yield curve inversion across maturities up to four years suggests the market is anticipating further deterioration, with concerns over political instability and a lack of credible fiscal reform. Equity markets across Europe declined, with the STOXX Europe 600 leading the losses by falling 1.54% over the week, as broad-based selling reflected concerns over geopolitical and economic uncertainties. Overall sentiment in the euro area was negative. The euro fell 0.30% against the U.S. dollar. Meanwhile, Brent crude climbed 2.85% amid rising geopolitical tensions between Israel and Iran, fuelling concerns over potential supply disruptions through the Strait of Hormuz—a chokepoint for nearly 20% of global crude flows. Though no attacks have yet occurred, the market remains on edge as any escalation could significantly tighten global supply at a time when inventories are already below seasonal averages, further supporting prices.

Eurozone inflation fell to 1.9% in May 2025, supporting one more ECB rate cut, while German investor confidence surged amid fiscal stimulus and easing monetary policy.

Eurozone inflation declined to 1.9% in May 2025, down from 2.2% in April, falling below the ECB’s 2% target for the first time since September 2024. This drop reflects easing price pressures, driven primarily by a 3.6% YoY decline in energy prices and a slowdown in fresh food inflation to 4.3%. Core inflation, excluding volatile items, moderated to 2.3% from 2.7%, with services inflation decreasing significantly to 3.2%, its lowest since March 2022. Despite this overall moderation, inflation rates vary across member states, with Cyprus, France, and Ireland showing the lowest inflation, while Romania, Estonia, and Hungary report the highest. This trend supports expectations of one more ECB rate cut this year to a new neutral level, although inflation could rebound due to geopolitical tensions and rising energy prices, particularly oil. Meanwhile, German investor confidence surged in June, with the ZEW economic sentiment index jumping to 47.5, well above forecasts, driven by expectations that fiscal stimulus and ECB rate cuts will boost growth. Although concerns remain over U.S. trade tensions and Middle East instability, improved current conditions and large-scale fiscal packages support cautious optimism for the German economy in the near term.

Eurozone inflation fell to 1.9% in May 2025, driven by lower energy and services prices, supporting expectations of continued ECB monetary easing.

Euro area inflation fell to 1.9% in May 2025 from 2.2% in April, dipping below the European Central Bank’s 2% target for the first time since September 2024 and reinforcing expectations of continued monetary easing. The decline was driven by a 3.6% year-on-year drop in energy prices and softer food and services inflation, with the latter falling to 3.2%—its lowest level since March 2022. Core inflation, which excludes energy, unprocessed food, alcohol, and tobacco, also moderated to 2.3% from 2.7%, signalling broader disinflationary momentum. Services remained the main contributor to headline inflation, followed by food, alcohol and tobacco, while energy exerted a negative contribution. Significant divergences across the bloc persisted, with Cyprus (0.4%), France (0.6%), and Ireland (1.4%) recording the lowest rates, in contrast to elevated readings in Estonia (4.6%) and Slovakia (4.3%). While the ECB’s June rate cut aligns with the softening inflation profile, policymakers have emphasized that further action will depend on incoming data and the evolving macroeconomic outlook.

We expect just one more ECB rate cut this year, reaching a new neutral level. However, we believe inflation could rebound due to geopolitical tensions and further increases in energy prices, particularly oil.

German investor confidence surged in June, driven by fiscal stimulus and ECB rate cuts, despite ongoing concerns over U.S. trade tensions and Middle East instability.

Investor confidence in Germany improved significantly in June, with the ZEW economic sentiment index surging to 47.5 from 25.2 in May—well above the Bloomberg consensus forecast of 35—reflecting growing optimism that fiscal stimulus measures will outweigh concerns over trade tensions and geopolitical risks. The ZEW index measuring current conditions also showed notable improvement, rising to -72.0 from -82.0, indicating momentum in the right direction despite remaining negative. This surge in sentiment aligns with recent forecasts by major German economic institutes, which now project growth for Europe’s largest economy following two years of contraction. Confidence has been buoyed by the German government’s approval of a €46 billion tax relief package and a €500 billion infrastructure fund, as well as recent interest rate cuts by the European Central Bank. The measures aim to support business investment and consumer spending, helping to revive domestic demand and reduce Germany’s reliance on exports. While analysts caution that risks such as U.S. tariffs and instability in the Middle East could cloud the outlook, the prevailing view remains cautiously optimistic, supported by the potential for easing tensions and sustained fiscal support.

We expect German investor confidence to remain resilient in the coming months, supported by fiscal stimulus and monetary easing, despite persistent global trade and geopolitical uncertainties.