EU-RUSSIA: Danish EU Pres.-Gov'ts Look To Freeze Russian Assets Long Term

A Bundesbank proposal for a German debt brake reform would bring German debt/GDP down below 70% by 2040 (after a peak of around 75% in 2032), representing a fiscal tightening vs current rules. However, the government's susceptibility to implementing the proposal appears rather low at the current stage.

• "The Bundesbank does not consider the current rules in the Constitutional Law to be suitable for reliably securing sound public finances. In particular, the possibility of unlimited borrowing for defense, both in terms of time and volume, stands in the way of this".
• The Bundesbank already had a debt brake reform proposal in place briefly before the government's fiscal easing announcements last March - but the realized measures by the government did not have much in common with that proposal back then. Any implemented debt brake reform will always come down to the political process, and the government has enacted its own commission to come up with a debt brake reform proposal.
• The Bundesbank suggests implementing their proposal through a constitutional law amendment although this would require votes from fringe parties from either the left or right. That would likely have to be bought through concessions ("Die Linke") or seem unlikely since the party is not being negotiated with more generally (AfD).
• The proposal follows continued claims from different sides (1,2) of a misuse of the infrastructure funds for financing of consumptive government spending. Key finance ministry advisor Sudekum meanwhile pushed back against these claims in a October 10 MNI Exclusive.

Details of the proposal below:

• Until 2029: Current debt limits remain unchanged, and deficit margins will be used in a more targeted manner.
• 2030-35: The structural deficit ratio will gradually decline towards 1% (by around ½ PP p.a.), in line with EU rules. Defense spending will increasingly be financed without loans. Outflows from the SVIK (E500bln infra fund will be stabilized (at around 0.8% of GDP p.a., with the last funds being paid out in 2035). The federal and state governments will retain credit limits of 0.35% of GDP each.
• From 2036: The federal government's credit margin for additional investments is 0.8% of GDP (based on SVIK, independent of the debt ratio). Additional credit margins for the federal and state governments depend on the debt ratio in order to firmly anchor the 60% EU reference value: > 60% à the borrowing scope for the federal government and the states is 0.1% of GDP each, < 60% à the borrowing scope is 0.35% of GDP each (as is currently the case). Further design options support a steady budgetary policy. These include a modified cyclical adjustment procedure.

The dovish move in the GBP short end also extended in the wake of the soft U.S. weekly ADP employment print, before fading from, session extremes.

• This morning’s UK labour market data drove meaningful repricing.
• Liquid BoE-dated OIS contracts are 3.8-8.6bp more dovish on the day, with ~21bp of easing priced for December, 31bp through February, 40bp through March and 51bp showing through April.
• SONIA futures last flat to +8.0, with the year-to-date high in SFIZ6 (96.700) holding to the tick.
• SFIZ5/Z6 registered an incremental fresh cycle low at -42.5 vs. -42.0 previously.
• SONIA options flow has been heavily skewed towards upside structures.
• GBP 1y1y also broke its October lows but failed to test the year-to-date low at 3.343%.
• Meaningful dovish extension in the immediate future would require the market to price a December cut with near certainty.
• We get two CPI releases ahead of the Bank’s December meeting (the first coming next week).
• The recent adjustments to the BoE’s forecasts mean that downside surprises to headline CPI are going to be harder to achieve when compared to the previous forecasts.
• If the soft details in today's labour data are not revised away in the next release, we assume that in line CPI readings would be enough to tilt the balance towards Governor Bailey joining the dovish camp, cementing a December cut.
• Note that J.P.Morgan now expect three more BoE rate cuts, coming in December, March, & June, which would leave the terminal rate at 3.25% (previously they looked for cuts in February & April, to a terminal rate of 3.50%).

• RES 4: 1.1728 High Oct 17
• RES 3: 1.1669 High Oct 28 and key resistance 
• RES 2: 1.1627 50-day EMA
• RES 1: 1.1606 Intraday high
• PRICE: 1.1601 @ 14:46 GMT Nov 11
• SUP 1: 1.1469 Low Nov 5 and the bear trigger 
• SUP 2: 1.1425 1.500 proj of the Oct 17 - 22 - 28 price swing
• SUP 3: 1.1392 Low Aug 1 and bear trigger 
• SUP 4: 1.1313 Low May 30

EURUSD has traded higher today. The pair has breached an initial important resistance at 1.1584, the 20-day EMA. The break paves the way for an extension of the corrective cycle, towards the 50-day EMA, at 1.1624. A clear break of the 50-day average would highlight a potentially stronger bull cycle. On the downside, a reversal would refocus attention on the bear trigger at 1.1469, the Nov 5 low. Clearance of this level would resume the downtrend.