PLN: Zloty Loses Shine, Geopolitics At Forefront

Zooming out, the general theme of spread tightening seen over the last week or so has been driven by several factors:

• Notable demand at the early round of ’25 EGB syndications (which included long end OAT supply).
• Continued narrowing of ASW spreads in Germany (linked to German fiscal/supply risk, as well as increasing free float).
• Dovish ECB repricing countering some of the early January hawkish adjustment
• Fresh record highs across some of the major European equity indices.
• An associated move lower in EUR implied FI vol. metrics.
• Some of the major EGB/Bund spreads trade near key levels.
• OAT/Bunds once again struggles to trade meaningfully below 75bp, with French fiscal and political risks continuing to limit spread tightening below that level, at least for now.
• BTP/Bunds near multi-year lows, last ~107bp.

SX5E (21st Feb/21s Mar) 4700/4800p calendar, aggressor is the seller at 17.25 in 37.5k.

President Lagarde’s interview with CNBC did not come across as particularly dovish compared to recent GC commentary or her prior interview with the FT on December 23. Although EUR STIRs have rallied alongside core FI over the past hour, the lack of reaction in EUR FX suggests Lagarde’s views (and ECB monetary policy more generally) have not been a key driver - as noted in earlier commentary.

• Asked about how appropriate the prospect of four 25bp cuts by the June meeting is, Lagarde did not provide a view: “I leave it to them [other GC colleagues] to sort of anticipate and play that game of, you know, so many, at which pace etc”.
• Global equity futures have rallied alongside core FI over the past hour, likely factoring into earlier peripheral/semi-core outperformance versus Bunds.
• Price action here not driven by specific newsflow or headlines, but provides another example of the jumpy short-term nature of markets this week - with the eventful first few days of the Trump administration helping to underpin intraday vol here.
• Major EGB futures have continued to move away from earlier session highs, with Bunds now +8 ticks at 132.02 (vs an intraday high of 132.22).