EGBS: OAT Futures Narrowing Gap To Resistance; French Risks Still Present
OAT futures are slowly narrowing the gap to resistance at 123.23 (equates to the 3.35% 10-year yield level), currently +47 ticks at 123.16. Regional headline flow remains fairly limited, with yesterday’s pullback in near-term French political risks driving the intraday bid in EGBs.
Although French PM Lecornu now looks likely to survive tomorrow’s censure votes, France’s political/fiscal outlook still faces risks.
- Socialist leader Faure has noted that "I didn't buy the budget, I'm going to fight it tooth and nail from now on, and we'll see who on the right and the left gets satisfaction article by article."
- Lecornu will have to tread a fine line in budget negotiations to avoid losing implicit support of the Socialists and/or the LR. Some Socialist MPs (e.g. Paul Christophle) are still planning to censure the Government despite their Party’s intstructions.
- Additional concessions to the Socialists would further impede fiscal consolidation efforts, and likely push the expected 2026 deficit closer to 5.0%, rather than the 4.7% currently targeted.
That said, today’ s strength in OAT futures is continuing to support Bunds. Bund futures are once again testing the 130.00 figure (+29 ticks at 129.97), which shields resistance at 130.05 (76.4% retracement of the Jun 13 - Sep 3 bear leg).
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
EURIBOR OPTIONS: Large ERX5 Call Condor
ERX5 98.00/98.0625/98.125/98.1875 call condor, paper pays 1 for 18k
- ERZ5 is currently 97.985.
- X5 options expire on November 14th, so this structure looks for dovish developments into the ECB's October 30 decision.
SEK: Outperforming G10 Basket; JP Morgan Remain Bullish
SEK outperforms the G10 basket, supported by solid European equity performance and broad-based dollar weakness. There may also be some spillover from Governor Thedeen’s recent interview with Dagens Industri, which cements next week’s Riksbank decision as a very close call between a cut and a hold.
- USDSEK is down 0.5% at 9.2760. Technical conditions are bearish, with the pair narrowing the gap to the next key support at 9.2307 (March 2022 low). Clearance of this level would expose the psychological 9.0000 handle. EURSEK meanwhile has pierced the September 10 low of 10.9126.
- JP Morgan remain bullish on SEK as they “expect fiscal to continue to be an FX differentiator going forward and yield compression to continue to benefit high beta low-and and mid-yielders“.
- Over the weekend, Riksbank Governor Thedeen gave a rare interview to domestic press. Speaking to Dagens Industri, he said that the current rate decision is very close to call. While he noted that the August inflation outcome confirms the Riksbank’s view that the summer uptick was likely temporary, he still called for vigilance. Additionally, he confirmed that the SEK80bln of measures proposed in the 2026 budget was above the SEK50-60bln included in the June MPR forecasts.
- The Government has just announced a SEK26.6bln rise in defence spending as part of its 2026 budget announcements. We assume this forms part of the SEK80bln earmarked for next year.
- Speaking on the krona directly, Thedeen noted that “I don't have an exact forecast for the krona going forward, but I would guess that it is still somewhat weak”
ECB: Familiar Themes From Schnabel's Slides
ECB Schnabel's slides presented at the EIB's Chief Economist's meeting are here
Key messages are well in line with Schnabel's previous comments:
- "Interest rates are in a good place as inflation stabilises around our 2% target and the economy remains resilient at full employment"
- "Healthy balance sheets, lower uncertainty and fiscal expansion underpin domestic demand, counteracting a decline in net exports"
- "So far little evidence of China dumping exports, while the pass-through of a stronger exchange rate is likely to be limited"
- "Upside risks to inflation dominate, with tariffs, services inflation, food inflation and fiscal policy as potential drivers"
- "Monetary policy should keep a steady hand, tolerating moderate deviations from target"
