EM LATAM CREDIT: Argentina: FX Policy – Neutral
(ARGENT; Caa1/CCC/CCC+)
• The debate raged about whether to allow the ARS to free float or to maintain control within prescribed bands as the govt. insisted it will keep doing. ARGENT 35s stabilized at 5-year highs, last quoted $71.10, up about 15 points since the ruling party’s success in recent congressional elections, up 4 points since June 30th and up 4 ½ points YTD.
• The bonds have reacted to a stabilization of the FX just inside the upper end of the intervention limit as well as a steady pace of govt actions to lay the foundation for the passage of labor and tax reform. Accessing international markets will be key to increasing reserves to strengthen the credit profile and FX policy is an important decision factor for investors.
• President Milei is scheduled to meet several investors in NY today and one of them is PIMCO who intends to deliver the message that the govt should allow the currency to float freely in order to stop the pressure on the currency and encourage foreigners to invest in local assets.
• In past days and weeks, the govt. has insisted that it will maintain the existing range for the currency and intervene as necessary to maintain that band because it wanted to provide FX stability and continue to support lower inflation. The govt will persist with budget restraint, free market reforms as well as labor and tax reforms to provide longer term economic stability. The govt’s likely concern is that a free float would lead to devaluation, market instability and higher inflation.
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FRANCE: Rpts-Lecornu Could Be Reappointed; Wider Deficit Targets To Pass Budget
France's political environment remains in a state of uncertainty ahead of caretaker PM Sebastien Lecornu's appearance on France 2 this evening at 20:00CET (14:00ET, 19:00BST). Earlier, Lecornu claimed that the prospect of a dissolution of parliament was fading. The fact that it is Lecornu speaking, and not President Emmanuel Macron, may lend credence to this view. It would be the head of state speaking to announce a dissolution.
- Instead, after meeting this afternoon with figures from the centrist/centre-right 'presidential bloc', Lecornu will hold talks with Macron at ~18:00CET on the political situation.
- Le Parisien reports that "According to our information, one scenario is holding the upper hand more than ever in recent hours: a reappointment of Lecornu [...]. "this would allow the president to [buy some] time and perhaps pass a budget before the end of the year, because that remains the priority," explains a senior figure in the executive."
- A major issue remains the prospect of the suspension of the 2023 pension reforms. A senior figure from the conservative Les Republicains has warned, "We don't see how the right could not censor a government that reverses the pension reform."
- Le Monde notes, the caretaker PM said earlier, "The public deficit target must be kept below 5%" in the next budget, or "between 4.7% and 5%." [...] The 5% figure is striking. It means that Sébastien Lecornu is prepared for the public deficit to fall by only 0.4 points of GDP in 2026, half the amount targeted by François Bayrou." A softer stance on fiscal consolidation would also be a sign of efforts to bring the Socialists on board.
BONDS: BTP/Bund edges below 80.00bps
- The BTP/Bund spread is slowly edging below the 80bps level as the Italian 10yr Futures holds onto more gains than the German Bund.
- Next immediate support comes at ~77.9bps, the September low.
GOLD: Bulls Deepen Control, TD Cautious But Bullish After Break Above $4,000/oz
Spot gold registered a fresh all-time high of $4,049.6/oz before backing off to ~$4.040/oz.
- The break above $4,000/oz further reinforces the recent uptrend.
- Furthermore, our technical analyst notes that momentum studies highlight a condition known as momentum drag - where momentum remains in overbought territory and moves sideways - a bullish signal.
- The next projection resistance level comes in at $4,074.5/oz.
- TD Securities caution that “given the speed and magnitude of the rally since mid-August, which saw the gold rally nearly 20%, there is a risk that CTAs and others may be tempted to take some profits, as the "perfect" environment seldom holds consistently. Gold looks overbought, which suggests that anything that may question the speed of the Fed's easing, or an increase in volatility, could generate a robust downside. This could see a significant unwind of the late-summer rally in the relative near-term”.
- However, they ultimately remain bullish, noting that while there could be a “drop off recent highs, we expect average price to reach a new record north of $4,400/oz in the first six months of 2026, as the Fed eases into a higher inflation environment, official sector keeps buying and discretionary funds again position long”.
