POWER: Austria Urges EU Power Market to Decouple Prices from Gas

2026 Budget negotiations will once again be an important driver of OAT performance this week, with the National Assembly resuming talks on the revenue section today (after a weekend off to battle “fatigue” amongst policymakers). In an interview with Le Parisien over the weekend, Budget Minister Montchalin said that the current make-up of the budget implied a deficit of 5.0% GDP – three tenths above PM Lecornu’s 4.7% target. A Le Parisien Senate source suggested the deficit may even be higher: “certainly 5.1 to 5.2%”. 

• Ultimately, the Montchalin interview highlights that the cost getting the budget passed will be worse-than-hoped fiscal metrics.
• The 10-year OAT/Bund spread is currently at 74bps. Poor global equity performance at the end of last week pushed the spread away from Thursday’s ~71.5bp multi-month low.
• In the near-term, passing a budget is undoubtedly the most OAT-positive outcome, and could set the stage for the 10-year OAT/Bund spread to move back below 70bps for the first time since mid-August.
• The impact of slower fiscal consolidation may have more of an impact next year (i.e. after the budget is passed), with fundamentals screening OATs as less attractive from an RV standpoint versus EGB peers (e.g. SPGBs, BTPs or GGBs).
• The risk of a breakdown in budget talks has reduced in recent weeks, but remains present. If talks fail, this would likely bring the 80bp figure back into focus.
• Montchalin also re-iterated that the 2023 pension reform will be suspended if there is a vote on the budget (against fears the Senate may reinstate the reform in its deliberations of the Social Security bill, starting Wednesday).
• See here and here for the stories in local media.

Gilts firm alongside core global FI peers with any selling pressure at the open quickly countered.

• A reminder that the reintroduction of fiscal risk premium to gilts after Chancellor Reeves’ apparent u-turn on income tax hikes triggered a sharp sell off in UK paper on Friday.
• Futures little changed at 92.15 after the bearish correction extended further on Friday.
• Initial support of note located at 91.82, while bulls will need to close Friday’s opening gap lower (93.35) to start turning the technical tide back in their favour.
• Yields 1.0-2.5bp lower, curve bull steepens.
• Benchmark yields have registered the highest level of November over the past couple of sessions.
• Weekend press reports were focused on smaller taxes and opinion pieces surrounding fiscal policy, nothing to really move the market.
• Gilt/Bunds ~185.5bp, little changed after lodging the highest close since Oct 21 on Friday.
• BoE MPC member Mann will speak this afternoon (13:20 London). A reminder that we have previously suggested that speeches from MPC members outside of Governor Bailey are likely to have less impact for markets in the run up to the December decision (given their entrenched views).
• CPI data (Wednesday) headlines this week’s UK calendar (see our gilt Week Ahead & morning STIR bullet for more on that release, our full preview will cross in due course).

• RES 4: 93.33 Low Nov 13 a gap high on the daily chart 
• RES 3: 93.07 20-day EMA        
• RES 2: 92.85 High Nov 14 
• RES 1: 92.44 50-day EMA  
• PRICE: 92.12 @ 08:10 GMT Nov 17
• SUP 1: 91.94 Intraday low       
• SUP 2: 91.82 High Sep 11 and a former key breakout level
• SUP 3: 91.67 50.0% retracement of the Sep 3 - Nov 4 bull leg   
• SUP 4: 91.12 61.8% retracement of the Sep 3 - Nov 4 bull leg  

Gilt futures gapped sharply lower on Friday. For now, a move down is considered corrective and the next key support to watch lies at 91.82, the Sep 11 high and a former key breakout level. Moving average studies remain in a bull-mode position, highlighting a dominant uptrend. First resistance to watch is 92.85, the Nov 14 high. On the downside, a break of 91.82, the Sep 11 high, would strengthen a bear theme.