EMISSIONS: EUAs Fall On EU Gas, Equities Losses

OAT/Bunds a little over 1bp wider at 86.2bp, threatening to register the highest close of ’25.

• The January closing high (86.3bp) protects the Dec ’24 closing high (88.4bp).
• Sell-side comments that we have read generally play down the odds of a meaningful break above 90bp in the spread, unless we receive further OAT-negative news (namely via some form of election/increased odds of RN coming to power).
• Commerzbank note that “if Lecornu fails to find a new team backed by LR and the Socialists over the next couple of days, the most likely scenario now seems to be Macron appointing a PM from the centre-left. We consider this more likely than him dissolving parliament again or stepping down himself. While fiscal dynamics remain very challenging and the political situation deadlocked, opportunistic demand from domestic banks and foreigners should inhibit a sustained widening above 90bp vs. Bunds, while we expect the BTP convergence to extend further out on the curve”.
• Goldman Sachs suggest that “OAT/Bunds already trades near the widest levels in years, the OAT-idiosyncratic component vs. EGBs has risen substantially and France has experienced the largest rise in country risk among major markets since elections last year. In our view, this suggests near-term election risks have largely been pre-empted by current pricing. As a result, we would expect OAT/Bunds to remain near current levels until uncertainty abates, rather than significantly wider. We maintain our target of 70bp at year-end, albeit with upside risks”.
• Mizuho suggest that the appointment of a new PM (pointing to a 35% probability of such an outcome) would trigger a “relief rally” that would push OAT/Bunds back towards ~75bp. Meanwhile they suggest that legislative elections (they ascribe a 55% probability to this outcome) risk a break above 90bp in the spread owing to odds of RN winning. Finally, they believe that a snap Presidential election (10% probability) could risk a break above 100bp, owing to RN’s chances of victory, along with the party’s expansionary fiscal preferences.
• ING can see “French spreads experiencing more widening pressure as uncertainty lingers and new legislative elections loom, but also as the market is looking at increasing tail risks such as an early end to Macron’s presidency. If that latter fear gains more traction, we think the OAT/Bund spread could start to venture well beyond 90bp”.

• SX5E (21st Nov) 4875/4825ps, bought for 1.5 and 1.6 in 5k.
• SX5E (17th Oct) 4850/4800ps, bought at 0.10 in 5k.

Compressed EUR front-end rates volatility remains a theme, with recent data/political developments not enough to tempt ECB officials from deviating from the well-signalled “good place” stance. President Lagarde yesterday re-iterated the data dependent approach. The immediate fallout from French (ex-) PM Lecornu’s resignation yesterday sparked a fleeting ~2.5 tick rally in the likes of ERU6, but these moves quickly faded.

• It’s notable that the ESTR forward curve from the 1y1y point onwards is currently very similar to the April 2 close (i.e. just before Trump’s Liberation Day announcement). Markets have fully unwound the early April uptick in trade policy uncertainty, with focus now on the direct (rather than indirect) impacts of tariffs and the implementation of German fiscal stimulus.
• We think markets are justified in pricing in some implied probability of hikes over the coming years to account for increased fiscal stimulus, but believe that the risk of another cut still comfortably outweighs the risk of a hike (Chief Economist Lane explicitly said as much yesterday). It’s also historically been rare for the ECB to be hiking at the same time as a Fed cutting cycle, though the idiosyncratic nature of proposed German stimulus measures may caution too much reliance on past trends.
• ECB-dated OIS continue to price ~10bps of easing through the middle of next year.