FRANCE: /OATS/RATINGS: Downgrade Risk Evident, With S&P Set To Update On France After Hours
May-31 09:50
S&P is set to provide an update on France after hours, with downgrade risk apparent.
- S&P currently has France at AA; Outlook Negative.
- That is one notch above the equivalent rating at Fitch (AA-; Outlook Stable).
- Moody’s has France at the S&P equivalent rating (Aa2), but with a ‘Stable’ outlook.
- A wider-than-expected ’23 deficit and flatter debt/GDP path in the government’s projections generated French fiscal worry in late March/early April.
- That drove spread widening for OATs, although the lack of negative ratings action from both Fitch & Moody’s in the interim, along with greater hope surrounding GDP growth, placated some of the worry, allowing spreads to retrace from wides.
- Subsequent action and rhetoric from French policymakers highlights a need to cut spending, but poses risks to the ruling political party.
- A one-notch downgrade from S&P would likely promote fresh OAT spread widening, although a sizeable move beyond year-to-date wides vs. Bunds seems unlikely as many expected such action back in early April (assuming a Stable outlook alongside such a downgrade).
- Select sell-side comments on this evening's update can be found below:
- Commerzbank: As the outlook is already negative and the deficit trajectory has clearly worsened since December, a downgrade to AA-/stable should not be a big surprise.
- Danske: Given that the fiscal outlook has worsened, we expect a one-notch downgrade tonight. This should have a modest widening impact on OAT spreads.
- Mizuho: We see a risk of a downgrade for France, which would likely drive OAT-Bund spreads back to the April wides.
- UniCredit: There is only a small difference between the government’s latest debt/GDP forecasts and those of the agency’s. We think that the room for a spread significant widening is limited given that the majority of OAT holders are not very sensitive to changes in ratings. The elevated liquidity of OATs and an improving picture for fixed-income markets, in light of expected ECB rate cuts will also be supporting factors.
Fig. 1: 10-Year OAT/Bund Spread (bp)
Source: MNI - Market News/Bloomberg
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OUTLOOK: Price Signal Summary - EURUSD Trend Condition Remains Bearish
May-01 09:50
- In FX, EURUSD traded lower Tuesday. The pair has recently pierced resistance at 1.0718, the 20-day EMA, however the latest move higher appears to be a correction and the trend direction remains down. A resumption of the trend would open 1.0568, the Nov 2 2023 low, and 1.0525, the base of a bear channel drawn from the Dec 28 high. A clear break of the 20-day EMA would instead signal scope for a stronger recovery. The 50-day EMA is at 1.0771. The 50-day EMA is at 1.0775.
- The trend condition in GBPUSD remains bearish. Recent gains are considered corrective and this has allowed an oversold condition to unwind. Moving average studies remain in a bear-mode set-up and the recent break lower, maintains the downward price sequence of lower lows and lower highs. A resumption of the trend would open 1.2266, the Nov 14 2023 low. Resistance to watch is 1.2576, the 50-day EMA.
- The USDJPY trend condition remains bullish. However, Monday’s volatile session highlights the start of a possible corrective cycle. An early rally Monday stopped short of resistance at 160.20, the Apr 1990 high. Note that the trend condition is overbought and a deeper retracement would allow the overbought set-up to unwind. Initial key support to watch lies at 154.58, the 20-day EMA. The 50-day EMA lies at 152.31.
GILTS: Stabilising After Bearish Pressure Seen In Wake Of Auction
May-01 09:31
A relatively wide tail in the latest 10-Year gilt auction weighs on the space.
- Futures touched fresh session lows in the wake of the auction, building on the pre-auction concession, before stabilising.
- The contract last prints -25 at 95.53 (95.44-74 range).
- Initial support at the 25 April low (95.36) is nearing.
- A breach there would expose round number support (95.00).
- Cash gilt yields are 2.5-3.5bp higher across the curve, bear flattening.
- 2s printed the highest yield level seen since the late Feb benchmark roll.
- 10+-Year benchmark yields are all a touch below their respective April highs, while 5s had a look through their April peak.
- Spill over weakness from U.S. Tsys was seen at the open.
- GBP STIRs are off hawkish session extremes, ’26 SONIA futures probe cycle lows.
- BoE-dated OIS shows ~38bp of ’24 cuts, with a little over 90% odds of a 25bp cut priced through the end of the Sep MPC.
- Final UK manufacturing PMI data was marked higher but remained below the breakeven 50.0 level.
- Nationwide house price data was softer than expected but isn’t a meaningful market mover.
- Focus now moves to the U.S. data releases and FOMC decision.
| BoE Meeting | SONIA BoE-Dated OIS (%) | Difference Vs. Current Effective SONIA Rate (bp) |
| May-24 | 5.207 | +0.7 |
| Jun-24 | 5.137 | -6.3 |
| Aug-24 | 5.026 | -17.3 |
| Sep-24 | 4.968 | -23.1 |
| Nov-24 | 4.879 | -32.1 |
| Dec-24 | 4.822 | -37.8 |
FOREX: USD/CHF Edges to New YTD Highs Amid Holiday-Thinned Volumes
May-01 09:31
- CHF is the poorest performer in G10 amid a quiet and thin trading session in Europe. USD/CHF sits just below new YTD highs printed at 0.9224 today, building on the strength noted across Tuesday trade. The Wednesday high is just 20 pips shy of the bull trigger and Oct’23 high of 0.9244 and the 50% retracement for the downleg off the Dec’22 high at 0.9240.
- Labour Day market holidays across the continent keep many markets closed, and that's filtered into currency market activity. Cumulative G10 FX volumes are ~30% below average for this time of day - however liquidity and volumes should shore up slightly through the NY crossover.
- JPY is softer as markets continue to lean back against intervention-inspired gains, and the recovery off lows for AUD has helped that cross stabilise above Y102.00, and any renewed rally will likely re-spark concerns over official action to mute JPY volatility.
- Focus for the duration of the session rests on the ISM Manufacturing data for April, where markets expect a modest moderation in the prices paid component to 55.4 from 55.8, ahead of the Fed rate decision. While headline policy is expected unchanged, markets remain cognizant of the risk of a change in language surrounding the characterization of inflation - a notable hawkish risk as markets continue to price out the likelihood of Fed rate cuts across 2024.
