Periphery rating
Italy: last Friday, Fitch affirmed rating (BBB) and outlook (Stable). Moody’s is scheduled to update its credit assessment of Italy (Baa3, Outlook Negative) on 17 November. We do not expect Moody’s to take any negative action in this window, as the fiscal and macro dynamic has been much better than previous Moody’s projections. If any future change to the rating/outlook is to occur, we expect it to happen next year, but only after new data about GDP activity and fiscal execution.
Spain: we expect Fitch to affirm its rating and outlook on Friday (A-, Outlook Stable). Looking ahead, the odds for 2H24 are somewhat tilted towards a positive action (which will require some clearer evidence of growth resilience and fiscal consolidation).
Portugal: Moody’s is scheduled to review ratings on Portugal this Friday (Baa2, Positive Outlook). In our view, the latest political noise is largely offset by the very positive economic and fiscal performance over the last three years and by the decision of the president, Marcela Rebelo de Sousa, to keep the current government in place for a few weeks in order to approve the budget law for next year. In this sense, our expectations for this Friday are tilted towards an upgrade of the rating, and whatever the outcome this week we expect this to happen by the next scheduled window, which is supposed to be in May of next year.
Our strategic/tactical approach to the peripherals
- We are neutral on BTP for the next few weeks. We are not concerned by the next Moody’s decision, while some increasing concerns might be about the confrontational risk between Italian and European institutions. We thus consider as a baseline market approach the steepening of the Italian credit curve in the 2Y-10Y, also supported by the expected buyback activity in the 2024-2026 maturity bonds.
- We expect PGBs might continue the recent flattening of the credit curve in the 2Y-10Y, however we believe there is limited room for additional widening in the 10Y PGB-Bund spread as the political uncertainty is well offset by the strong economic fundamentals and by the unchanged favourable supply-demand imbalances for the next year. Any additional weakness in the long part of the PGB curve should be approached as a good entry opportunity.
Weekly supply
On the bills market total issuance will be c.EUR12.8bn in gross terms and c.EUR6.8bn in net terms (redemptions from Italy). In bonds Germany, France, Greece and Spain will be active, as well as the EU with a syndication (market expectations for a new 5Y benchmark and a tap in the Green long-end). Total issuance is expected to be c.EUR22.6bn both in gross and net terms (excluding EU syndication).