ITALY: One Notch Upgrade From Moody's Expected After Hours; Already In The Price
Nov-21 11:56
Moody's is scheduled to review Italy's sovereign rating after hours (current rating Baa3; Outlook Positive). We lean in favour of a one-notch upgrade, but believe this is already in the price for BTPs. A BTP-positive risk would be a one-notch upgrade to Baa2 and a maintained Positive Outlook, but this is not our base case.
- Moody's moved Italy to "Positive" in May, and have since noted that the draft budget for 2026 reflects fiscal discipline and is a "credit positive".
- Even with a one-notch upgrade, Moody's rating will still be below that of S&P and Fitch (both BBB+). This suggests there may be scope for further positive ratings action next year, but we await Moody's write-up of conditions for further upgrades before making such an assumption.
- At the end of October, Scope upgraded Italy's outlook to Positive (rating affirmed at BBB+), but noted that "the main credit challenges reflect i) high government debt and funding needs,...ii) weak longer-run economic growth performance; and iii) an ageing and declining working-age population weighing on productivity and fiscal sustainability". The still-high debt/GDP ratio was also noted as a potential ratings hindrance by Director General of the Treasury Barbieri last week.
- The 10-year BTP/Bund spread is currently at 76bps, with upward pressure intraday stemming from a renewed pullback in global risk sentiment. A linear model that captures ECB pricing, risk/vol proxies and fiscal/issuance fundamentals points to a fair value of ~78bps, so not far from current levels. On the other hand, we note that BTPs screen as slightly cheap on a simple ratings vs 10-year yield chart.
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US TSYS: Extending Highs, Tops Tuesday's Levels
Oct-22 11:55
- Treasury futures have climbed out of a narrow overnight range in the last few minutes, extending highs with 10s topping Tuesday's levels. No obvious headline or Block driver.
- At the moment, TYZ5 trades 113-27 (+3) vs. 113-29 high. Moving average studies are in a bull-mode position and this set-up highlights a dominant uptrend. Sights are on 114-10, the Apr 7 high (cont) and the next key resistance
- 10Y yield 3.9378% (-.0249). Next support in Yield comes at 3.90% which Equates to 104.04+ Today. The April low of ~3.85% (3.8564%) and lowest level since October Equates to 104.14.
- Data limited to earlier MBA Mortgage Applications (reported -0.3%), Tsys auction $69B 17W bills at 1130ET, $13B 20Y Note re-open (91210UN6) at 1300ET.
OUTLOOK: Price Signal Summary - Bull Cycle In Gilts Extends
Oct-22 11:29
- In the FI space, short-term resistance in Bund futures remains intact for now. The trend outlook is bullish following recent strong impulsive gains and sights are on the next key resistance at 130.80, the Jun 13 high. Clearance of this level would strengthen the bullish condition. Note that the contract is overbought, a deeper pullback would allow this condition to unwind. Initial key support is 129.30, the 20-day EMA.
- A bull cycle in Gilt futures remains intact and today’s gap higher strengthens the bullish condition. The contract is through its recent high of 93.17, the Oct 17 high. This confirms a resumption of the uptrend and signals scope for an extension towards 93.95 next, a 1.500 projection of the Sep 3 - 11 - 26 price swing. Note that the contract is overbought, a pullback would allow this condition to unwind. A key support to watch lies at 91.65, the 20-day EMA. Initial support lies at 93.17, the Oct 17 high.
CHINA-EU: EU Preparing Responses To Rare Earth Restrictions: BBG
Oct-22 11:25
Bloomberg reporting on potential EU responses to China's rare earth restrictions:
- "The European Union is working on trade options to counter China’s planned export controls on critical raw materials should the bloc fail to reach a diplomatic solution with Beijing."
- "The European Commission is preparing a list of trade measures by the end of the month that can later be deployed against China to boost its negotiating leverage, according to people familiar with the matter. The commission is also developing a plan to protect critical supplies in the short-term and secure other sources. "
- "The issue will likely be addressed at an EU leaders’ summit in Brussels this week, though the commission wants to avoid a discussion on specific measures, said the people, who spoke on the condition of anonymity. They declined to say what trade options the EU could consider, citing the sensitive nature of the matter."
