The umpteenth new “dovish” reassessment? we now seem to be fully immersed in a phase of high (dovish) sensitivity by market participants to the short-term data flow, and this doesn’t look like it is changing much this week.
The French connection: brace for (just?) noise ahead: i) If it was just a question of “uncertainty about a tight outcome for the election”, it would arguably not be too different to previous occasions where the “threat” of the far-right has been present. However, it looks like the question now is which of the main contenders sounds less bad (to the market). ii) the cornerstone seems to be referring more to mid-term, more structural variables. Even if there is not a big winner in these elections, the most likely scenario is that no majority-supported/stable government will be formed, which would take us back to the well-known scenario of a long-lasting weaker fundamentals for France.
Curves outlook: in defensive (but not yet “panic”) mode. We think it is unlikely that the current defensive context will change materially in the short term: we keep the door open for an eventual visiting (but definitely not breaching) of the lower bounds of the ranges in the long parts of the swap and core sovereign curves (4.20% for US Try, 2.30% for Bund). However, we struggle to accept that this is ushering in an overwhelming risk-off mode in the sovereign and swap realm.
Tactical approach on peripherals: i) We expect market volatility linked to the French elections to persist and thus we prefer to maintain a positive attitude to Spanish and Portuguese assets vs. French ones; ii) we expect both the SPGB and PGB credit curves in the 10Y-30Y area to follow a bearish-flattening (in case of risk-off) and bullish steepening (in case of risk-on) performance during the next few weeks; iii) regarding Italy, we expect a stabilisation of the 10Y ASW level at the current 115bp area, while the main driver of BTP-BUND spread will be the specific performance of the German asset. The longer part of the curve (namely >20Y) should remain the one less exposed to credit spread variation vs. German pricing.
Weekly supply. On the bills market total issuance will be c.EUR14.9bn in gross terms and c.EUR1.9bn in net terms (redemptions from Germany). In bonds Belgium, Germany, Greece, France and Spain wll be active this week. Total issuance is expected to be c.EUR31.2bn in gross terms and c.29.7bn in net terms (coupons from Italy and Austria).