Three separate sources of crisis are shaking international markets, and fears of something much worse are mounting. The most dangerous one for Europe, however, is neither on Wall Street nor in the Middle East. It is in Paris!
The first source of tension is US technology and growing scepticism about the astronomical investment in artificial intelligence. Meta reported revenue of $64.6bn (+26%), but investors focused more on other figures. They were concerned by capital expenditure of 135bn-145bn this year and quarterly free cash flow, which turned negative for the first time since the company went public, at $2.1bn.
The shares fell about 6%, while the cost of insuring its debt against credit risk (the famous CDS, which became familiar during the Greek crisis) reached a record high.
In other words, Wall Street is no longer satisfied with promises of AI “miracles”; it now wants to see when the billions being invested — much of it borrowed — will pay off.
The second source is clearly the Middle East. Brent crude rose above $113 a barrel yesterday after fresh Houthi attacks on Saudi facilities. Meanwhile, according to the New York Times, the US and Israel are preparing new strikes on Iran after the US midterm elections. That raises the risk of another energy shock, fuelling inflation and pushing interest rates higher.
The third source lies in the heart of Europe. The French 10-year yield touched 5.14% yesterday, its highest level since 2002, while the spread over the German 10-year bond exceeded 173 basis points.
But a gap of that size had not been seen since 2011, at the height of the eurozone debt crisis!
Just as significant is that there has been no broad-based rise in interest rates, as German and US bonds moved in opposite directions. For a time, the yield on French 10-year bonds even topped that on US Treasuries, for the first time since 2013.
France is now borrowing at a significantly higher rate than Greece, which during the bailout years was seen by markets as the archetype of fiscal irresponsibility.
It is clear, then, that the eurozone’s second-largest economy has entered a serious crisis of confidence. It has debt of about €3.6trn (119% of GDP) and a deficit of 5.4%. As if that were not enough, there is ongoing unrest on the streets and a presidential election in 2027, in which Marine Le Pen, leader of a hardline right-wing party, is currently the favourite.
When markets lose confidence in a state of this size, however, the pressure spreads to the banks. The 4.38% fall in Greek banks, which pulled the General Index down 2.11%, shows how fragile the international mood has become. The roughly 4% drop in the Euro Stoxx Banks index sends the same signal.
This situation also makes it harder for the European Central Bank to respond. The ECB has already raised interest rates twice this year because of high energy prices and meets again next week. A debt crisis, however, would call for exactly the opposite.
It is too early to say that we are facing a crisis on a par with that of 2011. What is clear, though, is that the conditions are in place for a very damaging interaction.
That is because the three sources of tension described above are emerging at the same time, with the risk that one could fuel another in its impact on markets.
In that context, today’s “verdict” from Moody's will be important. It is the last of the major rating agencies still to keep France at AA.