Key takeaways from last week's European Central Bank (ECB) meeting are the following: 1) A central bank willing to be more restrictive than the market anticipated: the ECB left the door open for a 50 basis point hike in July, flattening the curve as short-term yields rose more than longer-term yields; 2) Inflationary projections increased. The central bank notes that inflation is three quarters dependent on energy but also admits pressure from wage increases; 3) A major omission from the conference: Christine Lagarde made no mention of the creation of a tool to fight against the fragmentation of the bond market in Europe. Indeed, there were market rumors that measures would soon be taken to prevent the spread of yields between German bonds and "peripheral" bonds (Italy, Spain, Portugal, Greece, etc.).
As a result of point number 3, bond yield spreads in the periphery (Italy, Spain, Portugal, etc.) relative to German bond yields widened last week. Greece's 10-year yields reached their highest level since 2018.
Tensions on the bond market had some negative consequences on European equities which broke important support levels last week. Italy, a weak link in European equities, underperformed the rest of Europe with a 5% drop of the index on Friday.