PLN: Zloty Comes Under Pressure, Activity Data Headline Next Week

10-year EGB spreads to Bunds tighten up to 1bp this morning, as heightened expectations for incoming German Chancellor Merz’s fiscal package to pass through the Bundestag today prompts a rotation out of Bunds and into German equities.

• Although the EU has announced its “ReArm Europe” package to generate up to E800bln in region-wide defence spending, expectations are that actual increases in spending will fall short of this figure.
• Both fiscal hawks (e.g. the Netherlands) and high-debt states (e.g. Italy) have expressed hesitation around significant increases in debt burdens to fund defence expenditure in recent weeks. These fiscally conservative signals, alongside Germany’s more expansive plans, have limited spread widening episodes.
• The 10-year BTP/Bund spread is 1bp tighter at 109bps today, its narrowest since mid/late February.
• The ReArm Europe plan has driven divisions within the Dutch Government, with centre-right leader Pieter Omtzigt warning that uncontrolled borrowing would risk a debt crisis in comments to the Financial Times this morning.
• The 10-year DSL/Bund spread has been largely stable over the past two weeks, hovering between 21-22bps.

ASWs marginally tighter this morning, with the mix of setup ahead of today’s German fiscal vote, EGB supply, higher equities and firmer oil prices all factoring in as outright bonds soften.

• Note that the move is modest with ASWs vs. 3-month Euribor 0.1-0.6bp tighter, off cycle/all-time lows (indicative timings of today’s German fiscal voting procedure provided in previous bullets).
• Some remain bearish long end ASWs although the broader view on those spreads has become a little more balanced.
• We suggest that more caution is more warranted at this juncture, given the stabilisation in ASWs seen late last week and with less uncertainty surrounding the German fiscal outlook evident, at least in the immediate term.
• The increase in German fiscal spending will be a multi-year matter and the issuance burden will not start to really impact the market until H225 at the earliest.
• This backdrop, coupled with already short positioning in long end ASWs, could continue to promote vol. and deepen any spread widening episodes.

• Given the Risk On tone in Europe ahead of the German vote, and the continuation higher in broader European indices, focus turns to the {SX7E Index} Banking Index, while it is not the leading sector, it has now broken through the March high, highest since 2011.
• Next resistance is at 197.88, the 2011 high, but some Investors might favour the Psychological 200.00 level for the next resistance area.

(Chart source: MNI/Bloomberg).