POWER: Norway’s Government Divided Over EU Energy Regulations

Moving inline with the weakness for European bonds, the single currency has edged lower to be the session's poorest performer, although price action remains muted and ranges well contained.

• Having traded 0.8315 overnight, EUR/GBP is back to negative on the day - having reversed ahead of any test on the 50-dma at 0.8319 - a level markets have failed to break on three occasions in the past week or so.
• EUR/NOK is lower for a second session, extending the reversal off the post-Norges Bank high to just over 1%. Rate is now meeting support at the confluence of the 50-, 100-dmas of 11.7666/65.
• The greenback is more mixed. The USD Index is very mildly higher, but is holding the majority of Friday's slippage - leaving 108.541 the key level ahead.
• As a gauge of lighter volumes and limited liquidity today: EUR futures have traded volumes ~20% below average for this time of day, GBP ~50% lower and JPY ~40% lower.

Goldman Sachs’ new yield forecasts point to “around 20bp of further U.S. Tsy/Bund spread widening from current levels, given the sound foundation of economic divergence.”

• They suggest that “European fiscal support either at the country-level or area-wide level is likely to be modest, and unlikely to alter the 2025 cyclical outlook.”
• “Likewise, while the ECB is shifting in a more dovish direction, recent communication again underscored the lack of urgency to support the economy.”
• However, they caution that “the spread widening already embedded in curves suggests that a relatively protracted period of relative economic weakness in the Euro area is increasingly well-priced, and that risk-reward has become more balanced from a cross-market perspective with the UK or U.S”
• This leads them to conclude that “the clearest path to lower European yields in the near-term may be relief from global duration where pricing, in our view, has turned too bearish in the last month.”

Gilts follow Bunds lower.

• Futures trade as low as 92.58.
• Yields ~4.5bp higher, last week’s highs untested across the curve.
• A marginal downtick in final UK Q3 GDP data and the relative resilience in Tsys (which gilts have a higher beta to) fails to promote outperformance vs. German paper at this stage.
• Spread last 1.5bp wider, just below 224bp. Last week’s closing cycle high at 231.3bp.
• SONIA futures tick lower given impact from gilts and Europe, last flat to -4.0. They were little changed in early trade.
• BoE-dated OIS still showing ~61bp of cuts through ’25.
• Little of note on the UK calendar for the remainder of the week, which will leave focus on macro headline flow.
• A reminder that the Christmas holiday period will result in adjusted trading hours/closures, as well as depleted liquidity and volume.