/RATINGS: S&P To Update On France Later, Negative Outlook Move Likely

S&P are scheduled to provide their latest sovereign credit rating update on France (current rating: AA-; Outlook Stable) after the close (any time from 21:00 London).

• We view a negative outlook move as the most likely outcome.
• S&P downgraded France back in May (ahead of the EU & French elections) and a negative outlook move would match Fitch’s rating/outlook settings, one notch below Moody’s (Moody’s also have France on outlook negative).
• French political and fiscal risks have further intensified over the last couple of weeks, with PM Barnier ultimately risking some of his government’s fiscal credibility to try and promote political stability.
• Barnier’s choice to renege on the electricity tax hike outlined in the draft Budget has done little to placate his rivals.
• The far-right is now seeking further concessions alongside a threat to oust the government next week, if their demands are not met.
• While the initial market reaction to Barnier’s concession was OAT-positive, relief was limited, given the circularity of the fiscal and political risks.
• The OAT spread vs. 10-Year Bunds hit the widest level since ’12 earlier in the week, while 10-Year GGB yields traded through OATs for the first time and the 10-Year SPGB/OAT/PGB fly continues to register fresh cycle lows.
• Ratings/fiscal momentum remains integral for markets, with OATs already trading cheap vs. other EGBS when looking solely at credit ratings.
• This suggests that a negative outlook move from S&P would have limited lasting impact on OAT pricing (all else equal).
• Some desks have outlined 90bp vs. Bunds as a potential area of interest when it comes to OAT long entries, although this isn’t the consensus view.
• Most sell-side names remain cautious on OATs and suggest using any rallies/spread tightening to lighten exposure.

Fig. 1: OAT/Bund (rhs) & GGB/OAT (lhs) 10-Year Yield Spreads