EM CEEMEA CREDIT: Bank of Sharjah: Book Building Update

As we recently noted, markets remain sensitive to French headline flow. Lecornu’s reappointment as PM is unlikely to reduce medium-term fiscal/political challenges facing France, so scope for meaningful OAT/Bund tightening still appears limited. Latest sell-side comments on the matter can be found below:

• Commerzbank write “the left-wing parties may demand even larger concessions in the budget talks and Lecornu may be more willing to compromise for the sake of political stability and the tight time schedule to reach the budget for 2026. Yet the risk of less ambitious compromises, and no-confidence votes and ultimately new elections is hardly diminishing. We expect more setbacks ahead of year-end, as the new government is unlikely to inspire confidence in the medium-term budget consolidation plans, while another rating downgrade to single-A is looming next month ahead of next year's wall of supply”.
• Goldman Sachs note that “the market is likely already discounting the potential for early parliamentary elections. Wider spreads would likely result from early presidential elections, or the suspension of the pension reform”. On pensions, they note that “given the near-term impact on deficits would be small, it is difficult to judge how much of an accumulated effect the market should price, but with our estimated elasticity of spreads to deficits of around 10-12bp/pp such a scenario could see spreads widen another 10bp, although some of this risk is likely to be priced. Unlike prior episodes of sovereign stress front-end French spreads have been well-behaved. Given the steepness of the credit curve from current levels, and that a ‘muddle-through’ scenario is likely to allow OAT-Bund spreads to move back to the middle of the recent trading range, we expect the credit curve to flatten”.

• US markets are partially closed for Columbus Day on Monday, leaving no cash Treasury trade - which should also limit volumes and price action across currency markets. With the US still in government shutdown, data releases this week are further limited: although the BLS confirmed on Friday that this Wednesday's scheduled release of US CPI will go ahead on October 24th. Modestly stronger risk sentiment today has been fueled by the more complementary tone from Trump on China over the weekend, keeping low-yielders on the back foot while Antipodean currencies outperform.
• BoE's Greene & Mann are both set to appear today in speeches that could set the tone for UK trade this week. No fewer than 14 MPC appearances are on the schedule, and with no rate cut fully priced until April next year, markets will look to see if any speeches suggest this timeline can be brought forward, particularly if this Tuesday's jobs data comes in weaker-than-expected.
• Into the MPC speeches and the run of UK data, GBP/USD is off last week's lows, but inside the Friday range. This leaves the 1.3262 low as key support this week, a break below which exposes the 200-dma of 1.3178 and levels last seen at the beginning of August. It remains difficult to see a protracted GBP/USD sell-off absent a move in the USD however, and with an October Fed rate cut fully priced, there may be limits on how much further the greenback can rally from here.
• As was the case last Monday, the JPY is the weakest currency in G10. USD/JPY is back above 152.00, but a further rally above 152.64 will be needed to erase the sell-off triggered by Trump's threats to raise tariffs on China on Friday. Politics remains a key driver of the currency, with opposition parties set to meet tomorrow to discuss the collapse of the governing coalition last week. These meetings could help determine whether Takaichi goes ahead with a minority government, or looks to bring forward elections.
• The AUD/USD bounce, triggered by Trump's softer China language over the weekend, has the pair again either side of the 0.6532 100-dma. The 0.6560 50-day EMA marks the next upside level, which would go further in erasing last week's sell-off. This comes after Friday's support breaks undermined a recent bullish theme, potentially signaling scope for a deeper retracement towards key support at 0.6415, the Aug 21 and 22 low.
• Further newsflow and tone by both US and Chinese administrations in terms of rare earths and trade have the potential to induce volatility in the coming sessions. Polymarket odds for the US government to remain shut down until at least October 31st rose to above 2/3 over the weekend - suggesting that most official US data may be set for a continued absence. 

SX5E (17th Oct) 5600, sold the put at 9 in 5k (100% del).