ISRAEL: PM Office-Israel Will Respond Accordingly After IDF Off. Injured By IED

• In the FI space, a rally in Bund futures on Friday appears to be a correction - for now. Price remains below an important resistance around the 50-day EMA, at 129.04. A clear break of the EMA is required to signal a potential reversal. Recent weakness has resulted in a print below support at 128.52, 76.4% of the Sep 25 - Oct 17 bull leg. A resumption of the bear leg would open 128.25, the Oct 7 low.
• A sharp sell-off in Gilt futures last Wednesday strengthens a bear threat and cancels a recent bullish condition. The contract has traded through 91.82, the Sep 11 high, and the move down signals scope for a deeper retracement that opens 91.12, 61.8% of the Sep 3 - Nov 4 bull leg. On the upside, initial key resistance is seen at 92.70, the 20-day EMA. A clear break of the average is required to signal a reversal. For now, gains are considered corrective.

• SX5E (20th Mar) 6000/6300cs 1x2, bought for 24 in 5k (5kx10k).
• SX5E (16th jan) 5000p, (20th feb) 5000p, (20th mar) 5000p, trades as a Put Fly for -7 in 3k.

Moody’s upgraded Italy’s credit rating to Baa2 (Outlook Stable) on Friday, in line with our expectations. Further positive ratings action is possible next year, contingent on “continued fiscal consolidation resulting from further improvements in the quality of revenue and spending” and “faster progress in addressing structural challenges related to the labour market and innovation capacity, together with stronger private investment than we currently assume”

• We’ve previously argued that growth dynamics, rather than primary balance consolidation, presents the main risk to the Italian fiscal/ratings outlook. Worse-than-expected growth outturns may limit narrowing momentum in BTP/XXX spreads in the coming years.
• Analysts expect a cyclical rebound in Italian growth, from 0.5% Y/Y in 2025 to 0.7% in 2026 and 0.9% in 2027. These are broadly in line with the EC’s latest projections (0.8% in both 2026 and 2027).
• Private consumption is expected to be supported by low unemployment rates and positive real wage growth. Meanwhile, non-residential investment growth should continue to be aided by EU RRP disbursements.
• The key cyclical questions ahead will be if middle-class tax cuts announced in the 2026 budget spur additional consumption, and whether private investment can fill the gap left by RRP funds once that programme ends.
• Meanwhile, the outlook for potential output remains bleak. Although employment and hours worked have rebounded solidly post covid, sluggish growth metrics have implied poor productivity outturns. Meanwhile, Italy still has the highest inactivity rate across the Eurozone. Coupled with an ageing population, this presents a key structural headwind that government policy will need to address.