EMISSIONS: Funds Raise Bullish Bets in EUAs to New Record

• EUR/USD: $1.1520(E630mln), $1.1550(E565mln)
• USD/JPY: Y155.00($1.1bln)
• AUD/USD: $0.6535(A$1.7bln)

Germany's IFO Business Climate Index fell slightly, underperforming expectations in November at 88.1 (88.5 consensus, 88.4 prior). The current assessment reading improved marginally this time (85.6 vs 85.5 cons; 85.3 prior) but remained within recent ranges at a subdued level, while expectations were the driver behind the overall deterioration (90.6 vs 91.6 cons and prior).

• Across sectors, manufacturing underperformed after notable upside in October, while services moved back into expansionary territory. As a reminder, Friday's flash PMI release saw underperformance in both manufacturing and services.
• Across sectors, the press release notes that:
  • Manufacturing expectations in particular saw a "significant hit", with growing sceptism about the months ahead with lower order books, although current conditions were slightly better.
  • The service business climate "improved once again", with offsetting factors from a "somewhat more positive" current situation and a slight deterioration in expectations. "There was a noticeable setback in the transport and logistics sector, while sentiment in tourism brightened significantly."
  • The trade business climate deteriorated. "Companies assessed their current situation as somewhat worse, and expectations also declined. Retailers, in particular, were disappointed at the start of the Christmas season."
  • The construction index declined. "While the current situation shows a clear upward trend, expectations were once again more pessimistic. Weak demand remains a decisive bottleneck."

The 10-year OAT/Bund spread has narrowed ~0.5bps alongside peers today, with no material negative spillover from weekend political developments. The National Assembly overwhelmingly rejected the Revenue section of the 2026 budget, with the initial draft of the bill now moving to the Senate for review. We highlighted throughout last week that there was a clear lack of support for the Revenue bill, which had contributed to modest OAT/Bund widening back to ~76bps (e.g. here)

• In addition to the bad news being priced in through last week, intraday movements have been contained by optimistic signals from policymakers on continued budget negotiations. Finance Minister Lescure noted that “I’m convinced that the majority of parliamentary groups will be able to find the necessary common ground that will allow our country to have a budget”, while a Socialist source told Le Parisien that “The negotiations will continue until the end of the year”.
• This suggests PM Lecornu’s position as PM is stable, at least for now. That said, the outcome of negotiations suggests the PM’s 4.7% 2026 deficit target is unlikely to be met.
• The Social Security section of the budget has been reviewed by the Senate, and needs to be fully approved by December 12. The Revenue section meanwhile must be finalised by December 23. If these deadlines are not met, the government may need to pass a special law to roll over the existing 2025 budget, so that fresh negotiations can continue early next year.