EGBS: Early Rally In Bunds Fades; Pullback From Jun 13 High Still Corrective
Early downward pressure in 10-year Bund yields stalled just above the 2.50% level, with yields across the curve now back to ~1bp lower on the day. There wasn’t a clear headline driver for the early rally in EGBs, with markets still digesting the de-escalation in the Middle East alongside yesterday’s German and Italian fiscal/issuance announcements.
- Bund futures are -4 ticks at 130.80, peaking at 131.12 earlier this morning. Bunds remain in consolidation mode, trading below the Jun 13 high. For now, the recent move down appears to be a correction. Key short-term support to watch lies at 130.12, the Jun 5 low.
- The 10-year BTP/Bund spread found support at the 90bp handle, with a pullback in European equities from session highs helping to spread back to 91.5bps. Italy sold E3.0bln of the new 2.10% Aug-27 BTP Short Term and E3.0bln of the new 1.10% Aug-31 BTPei this morning.
- In France, the Socialist party has submitted a censure motion against the Bayrou government. Although RN leader Bardella said his party would not support the current motion, he still signalled that a vote of no confidence could still be called in response to the 2026 budget, proposals for which will be detailed next month. The 10-year OAT/Bund spread is 1.5bps narrower today at 69bps despite the evident political risks.
- Today’s regional data calendar has been light (French consumer confidence was a little weaker-than-expected), with focus turning to the Spanish and French flash June inflation prints on Friday.
- There will be some interest in the outcome of today's NATO summit, with leaders expected to sign off on a much briefer communique than is usually the case at these events, due to its truncated nature. Commitments on the '3.5%+1.5%' of GDP on defence spending is likely to be agreed, although potentially with wording that allows Spain, still holding out on the 5% total, to accept.
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EGBS: Goldman Sachs: Smooth Sailing For Sovereign Credit
Goldman Sachs write “the recovery in risk sentiment coupled with policy puts on both the monetary and fiscal side continue to create a favourable environment for European sovereign credit. Even a risk wobble on tariff and trade risks saw marginal widening in sovereign credit spreads, which outperformed their equity beta”.
- Goldman continue “to estimate that sovereign spreads are slightly tight to fundamentals, but the same dynamics that are likely to keep the EUR front-end steep also imply that growth upside should prevent material widening”.
- They note that “French political risk remains an ongoing uncertainty, although we do not expect this to worsen tangibly on a short-term horizon. Unless we see increasing pressure from opposition parties for fresh elections, sovereign spreads will likely remain tight given the current favourable macro backdrop”.
- Zooming out, Goldman note that “relative to our year-end targets, Bonos are the least stretched and, given the strongest fiscal fundamentals there, we continue to expect vol-adjusted outperformance in Bonos vs BTPs and OATs.
- Overall, they “prefer sovereign credit to gain duration exposure in Europe, given the more symmetric distribution for terminal rate pricing”.
CHINA: /RATINGS: Moody's Affirms China At A1, Outlook Negative
Moody's notes that "the affirmation of the A1 rating takes into account China's large, dynamic economy and capacity for innovation, even as we expect potential growth to slow towards 3.5-4.0% by 2030. Recent trends indicate an improving quality of growth, bolstering economic resilience. The debt burden is likely to increase further, although we expect that it will be partly offset by low interest rates supported by a large domestic savings pool. China's financial system provides large captive demand for government debt, while capital controls contribute to financial stability during periods of stress".
- "The negative outlook is driven by risks that trade tensions between China and its major trading partners could have a long-lasting negative effect on China's credit profile. In particular, shifts in global trade flows and dampened trade growth pose challenges to China's transition to higher productivity-led economic growth and its efforts to contain the rise in its government debt".
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COMMODITIES: Medium-Term Trend Signal for Gold Unchanged and Remains Bullish
WTI futures traded to a fresh S/T cycle high last Wednesday before finding resistance. The recovery since Apr 9, appears corrective. Key resistance to watch is $62.71, the 50-day EMA. It has been pierced, a clear break of it would highlight a stronger reversal and open $65.82, Apr 4 high. For bears a reversal lower would refocus attention on $54.33, the Apr 9 low and bear trigger. The May 21 price pattern is a shooting star - a reversal signal. Gold has recovered from its recent lows. The climb signals the end of the corrective phase between Apr 22 - May 15. Medium-term trend signals are unchanged, they remain bullish. Note that moving average studies are in a bull-mode position highlighting a dominant uptrend. A continuation higher would open $3435.6 next, the May 7 high. Key support and the bear trigger has been defined at $3121.0, the May 15 low.
- WTI Crude up $0.42 or +0.68% at $61.96
- Natural Gas down $0.02 or -0.6% at $3.313
- Gold spot down $22.78 or -0.68% at $3334.7
- Copper up $1.5 or +0.31% at $485
- Silver down $0.01 or -0.03% at $33.4544
- Platinum down $5.19 or -0.47% at $1091.32
