EGBS: A Fitch Downgrade Is Probably In The Price For OATs
- Fitch may downgrade France’s sovereign rating to A+ on Friday after hours, following Bayrou’s unsurprising ousting as Prime Minister after yesterday’s no confidence vote. However, given the political risk premium that has built up in OATs in recent weeks, we suspect markets have mostly priced in this outcome.
- President Macron’s office has said a new PM will be appointed in the coming days. See colour on the current front runners here .
- On March 14, Fitch affirmed France’s rating at AA- (Outlook Negative). In its report, Fitch noted that a downgrade would be possible if there is a “failure to implement a credible medium-term fiscal consolidation plan, for example, due to political opposition or social pressures” and/or if there is “materially lower economic growth prospects and weakened competitiveness.”
- Given recent political (and economic) developments, it seems the conditions for a downgrade have been met. If realised, Fitch would be the first major issuer to downgrade France from an “AA- equivalent” rating.
- S&P also maintains a Negative Outlook on France (rating AA-), but a review isn’t due until November 28. Moody’s holds France on a Stable Outlook (rating Aa3), with a review due on October 24.
- Other ratings action of interest on Friday include Fitch on Portugal (current rating: A-, Outlook Positive) and S&P on Spain (current rating A, Outlook Stable).
- Portugal was upgraded by S&P on Aug 29, so a similar outcome from Fitch is possible on Friday. OTs already screen a little rich on a simple ratings vs 10-year yield curve, so this may also (at least partially) be in the price.
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AUSSIE 10-YEAR TECHS: (U5) Recovers With Treasuries
- RES 3: 96.501 - 76.4% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 2: 96.207 - 61.8% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 1: 95.960 - High Apr 7
- PRICE: 95.710 @ 14:34 BST Aug 8
- SUP 1: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 2: 95.275 - Low Nov 14 (cont) and a key support
- SUP 3: 94.707 - 1.0% 10-dma envelope
Aussie 10-yr futures received a boost from the US Treasury rally that followed a poor NFP print. This keeps Aussie 10-year futures toward the top end of the recent range. To the upside, next resistance is at 96.207, a Fibonacci retracement point. Next support undercuts at 95.420 (pierced), the Feb 13 low, ahead of 95.275, the Nov 14 low and a key support. Clearance of this level would strengthen a bearish condition.
SECURITY: Trump To Sign Trilateral Peace Accord With Armenia/Azerbaijan Shortly
US President Donald Trump is shortly due to sign a trilateral peace agreement with Armenian Prime Minister Nikol Pashinyan and Azerbaijani President Ilham Aliyev at the White House. LIVESTREAM The event will provide another opportunity for Trump to style himself as peacemaker, after touting success in brokering peace deals between Rwanda/Congo, Cambodia/Thailand, and India/Pakistan.
- The accord aims to resolve a decade-long dispute over the sovereignty of Nagorno-Karabakh - a breakaway Azerbaijani province that was under de facto Armenian control from the dissolution of the Soviet Union until a 2020 war.
- Trump described the meeting on Truth Social as a “historic peace summit,” noting that the US will also sign “Bilateral Agreements [to] fully unlock the potential of the South Caucasus Region.”
- White House spokeswoman Anna Kelly told reporters that Trump would sign deals with both Armenia and Azerbaijan on energy, technology, economic cooperation, border security, infrastructure and trade.
- A White House official said: "It's about the entire region, and [the leaders] know that that region is known to be safer and more prosperous with President Trump."
- Reuters reports that the US will have development rights to build transportation links in the strategic Zangezur Corridor, a mountainous stretch of Armenian territory between Azerbaijan and its Nakhichevan exclave.
- Politico notes: “But whether this is just a photo opportunity or a lasting end to a conflict that has undermined stability in a region dominated by Russia and Iran will depend on whether the US can address several key challenges.”
FED: Balance Sheet Runoff Continues At Steady $20B/Month Pace (2/2)
Fed asset holdings were little changed in the past week. SOMA runoff totaled $2.8B (composed of $4.2B less nominal Tsy holdings and $1.4B more TIPS), with emergency lending/liquidity facilities $0.7B lower.
- Over the last 4 weeks, the $20B/monthly expected QT pace was roughly adhered to: MBS fell $18B, with Treasury net holdings down around $2B (a fall in TIPS holdings offsetting a slight rise in nominals).
- Discount window usage accounted for the fall in lending facility usage this week; takeup is now down to $4.9B, down $1.3B in the last month and down from the 1-year high of $6.4B set in July which looks to have been a temporary blip higher.
