Paris stocks slide further as uncertainty looms over Washington’s fiscal outlook and investor appetite for U.S. debt wanes
The Paris stock market continued its downward trend on Thursday, reflecting the ripple effect of Wall Street’s sharp sell-off the previous day. Investor anxiety is mounting globally, fueled by soaring U.S. bond yields and growing concerns over the potential fiscal impact of former President Donald Trump’s proposed budget bill, which could significantly widen the already large U.S. deficit. A key vote on the bill is expected in the House of Representatives later today.
Another Day in the Red for the CAC 40
At mid-morning, France’s benchmark CAC 40 index was down 0.79%, trading at 7,845.65 points. The decline follows a rough session on Wall Street, where all major indices finished deep in the red on Wednesday. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite dropped between 1.4% and 1.9%.
This sell-off was driven primarily by renewed attention to U.S. Treasury yields, which continue to climb. The yield on the benchmark 10-year note rose to 4.587%, its highest level since February, while the 30-year yield breached 5%, now sitting at 5.086%. Higher yields often reduce the appeal of equities, leading to broad-based market pullbacks, as investors shift towards safer, interest-bearing assets.
Trump’s Budget Proposal Raises Alarm
The broader market sentiment remains fragile, largely due to uncertainty surrounding Donald Trump’s proposed budget legislation. If passed in its current form, the bill could inflate U.S. federal debt by an additional $3 trillion to $5 trillion. That’s on top of an already ballooning national debt, which has hit an all-time high of $37 trillion. The annual budget deficit is also a major concern, currently hovering around 7% of GDP—levels typically seen during severe economic downturns.
Markets are nervous that Trump’s fiscal plan, which includes sweeping tax cuts, could undermine efforts to rein in inflation and stabilize public finances. Analysts fear that rather than offsetting the cost of tax relief through spending reductions, the proposal could lead to a dangerous increase in borrowing needs.
Treasury Auction Falls Flat
Investor worries were further exacerbated by the results of a U.S. Treasury auction on Wednesday, which offered $16 billion worth of 20-year bonds. Demand for the issuance was weak—an indication that buyers are growing wary of the country’s fiscal trajectory. This tepid response sent bond yields even higher and added to selling pressure on U.S. stocks.
The timing adds further tension, with the House Speaker Mike Johnson having set Memorial Day—May 26—as a target for passing the bill. However, negotiations remain ongoing, and there is skepticism about whether that deadline can be met.
Despite the uncertainty, some progress has been reported. Johnson announced that a compromise had been reached with moderate Republicans from Democratic-leaning states regarding local tax deductions, also known as SALT. The updated bill raises the deduction cap from the current $10,000 to $40,000, surpassing the previously proposed $30,000 threshold.
Still, the legislation—already over 1,000 pages long and amended multiple times—appears far from finalized. According to several lawmakers, finalizing the agreement could take another one to two weeks. Analysts also warn that the proposed spending cuts included in the bill may not be sufficient to counterbalance the revenue lost through tax reductions.
Markets Wary of Long-Term Impact
“The big question now is what this tax plan will actually look like from a fiscal standpoint,” said Sam Stovall, chief investment strategist at CFRA Research. “Will it erase the progress we’ve made in reining in budget deficits and controlling inflation? Investors are worried that we may be heading in the wrong direction again, which is why bond yields keep rising.”
Indeed, rising yields reflect a loss of investor confidence in the government’s fiscal discipline. Higher borrowing costs are also feeding fears of inflation and complicating the Federal Reserve’s path forward.
Economic Data in Focus
Thursday brings a full slate of U.S. economic data that could influence market sentiment further. Investors are awaiting weekly jobless claims, the S&P Global flash Purchasing Managers’ Index (PMI) for both manufacturing and services in May, and data on existing home sales for April—all due at 2:30 PM (Paris time).
Meanwhile in Europe, Germany reported a better-than-expected improvement in business confidence. The Ifo Business Climate Index for May came in at 87.5, up from 86.9 in April and slightly beating the consensus forecast of 87.4. The uptick suggests that German companies are feeling cautiously optimistic about the months ahead, despite broader economic uncertainties across the eurozone.
Outlook: Volatility Likely to Persist
With debt concerns mounting, bond markets rattled, and political uncertainty rising in the U.S., volatility is expected to remain a defining feature of global markets in the near term. Investors will be closely watching the outcome of today’s potential House vote on Trump’s budget proposal, along with upcoming U.S. economic reports that could sway expectations for interest rates and inflation.
For now, European equity markets are taking their cues from across the Atlantic—where the path of fiscal policy remains as uncertain as ever.