EGBS: Equity Resilience Pressures Major EGB Futures
European equity futures have proved resilient to the latest rhetoric out of China, with officials pushing back on reports that tariff negotiations have begun with the US. That resilience has weighed on major EGB futures, with Bunds -31 ticks at 131.57.
- A bull cycle in Bunds remains in play though, with resistance and the bull trigger at 132.03 (April 7 high) exposed. Clearance of this level would confirm a resumption of the uptrend and open 132.56, the Feb 28 high. Initial support is the 20-day EMA at 130.54.
- The German curve has bear flattened, with Schatz yields up 4bps and 30-year yields up 2bps.
- German IFO export expectations dropped in April, to -9.8 (-2.3 March), the lowest since May 2020. Meanwhile, French manufacturing production was stronger-than-expected at 99.5, with a notable divergence between individual and general production expectations.
- ECB’s Holzmann again struck a more dovish-than-usual tone, citing the disinflationary impact of tariffs so far and the growth-negative impacts of tariff uncertainty.
- 10-year EGB spreads to Bunds are within 1bp of yesterday’s close, with GGBs underperforming.
- The global risk backdrop and tariff-related headlines look set to drive EGB price action into the weekend.
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GERMANY: Constitutional Court Rejects Solidarity Surcharge Appeal
Matching media reports headline on the German constitutional court rejecting the solidarity surcharge appeal, which could have seen a potential E65bln levy payback to taxpayers in a worst-case scenario if it had gone through.
The rulings will be seen as a boost for the incoming Chancellor, but are broadly as-expected. The rulings effectively mean that the federal authorities can keep raising the solidarity surcharge, and no fiscal gap is to be created, as would have been feared if the appeal would have gone through.
- No tangible reaction in Bunds/ASWs given the lack of feedthrough for issuance.
- Note that the worst-case fiscal outcome for the government i.e. the one that would have generated the most meaningful increase in issuance from an adverse ruling, was viewed as a low likelihood outcome, explaining the lack of a Bund rally in the wake of the announcement.
