AFS Markets Blog: Midday 29/10/2026

• Meanwhile in markets, don’t expect a ‘oh, it’s France, we’ll help her out’ jibe from ECB President Lagarde at the presser after the interest rate decision this afternoon. Lagarde, who just announced her early departure as of February 7 next year, will give her compatriots tough love (but it may not be tough enough for some);
• I think that Lagarde will not go beyond the ‘monitoring the situation line’ regarding Bund spreads, and the OAT-Bund spread in particular.
• The ECB has this free-wheeling bond-buying program dubbed TPI. I say free-wheeling because, unlike the court-vetted OMT bond buying program, the member state in question need not to have requested and been granted a bailout loan from the EFSF/ESM or IMF. So, no contentious Troika oversight. Still, the ECB applies fiscal sustainability criteria before buying any bonds in the secondary market. My experiences with Eurocrats behavior, including ECB overlords, during the Eurozone crisis is that a carte blanche for bond purchases is never given. Any purchases of French sovereign debt – which I certainly don’t expect will happen – will be conditional on an austerity budget and a clear path towards a lower debt-to-GDP ratio. France meets neither condition. Italy is in a grey area but Portugal and Spain, who have suffered some minor collateral damage from Le Spread blowing out, could reasonably count on ECB support. Their budgets are comparatively sound. Debt ratios are falling. And quite rapidly so in the case of Portugal;
• The bottom line is that the ECB prefers to let the bond market vigilantes do their thing with regards to France. And hope and pray that market discipline alone will fix France. Still, we have seen that when the going gets a little bit too tough, the ECB will try to shepherd market expectations of rate hikes lower. And thus prevent a too rapid blowout of Le Spread;
• With France out of the way, let’s turn to Lagarde’s succession. Remarks this morning from the Eurogroup Chairman and various European politicians suggest that we will know in weeks or months who will succeed her next winter. Two names that keep popping up in the echo chamber of journalists and ECB watchers are former Dutch central bank President Knot and former Bank of Spain Governor De Cos. I have no clue who will win. Knot, De Cos, or some other candidate. I am expecting a continuity candidate and no hard-charging type like Lagarde’s predecessor, Mario Draghi. I think Lagarde did a reasonably good job in recent years. So, why change? Having said that, the risks are tilted towards a dovish and not hawkish candidate. Given the dismal fiscal situation across the Euro Area, there will be please for the ECB to ‘just do something.’  Help fund this or that scheme. I hope nothing comes out of it – the ECB should focus on inflation and inflation alone;
• Finally, about the ECB meeting itself, as per my preview, this will be a hold and not even a hawkish one. Inflation is turning out higher than expected because of energy prices even exceeding the ECB’s ‘adverse’ scenario. But that won’t make our central bank overlords more eager to hike. I expect a final 25bps hike in December. On the operational side of things, keep an eye on the ECB increasing Minimum Required Reserves;
• Turning to some market commentary, UST yields have been motionless this morning, with the 10y and 30y loitering near their lowest level in a month. European equities are up, with the Stoxx 50 gain half a percent and the CAC outperforming with a 1.1% gain. Responsible for the positive sentiment is yet another (temporary?) recovery in AI stocks, with AI-stock Oracle’s earnings getting a very warm reception. Brent crude futures are 1.2% lower at $114 a barrel while Dutch natural gas futures are down a heftier 3.3% at 97.4 euros per MWh. I need not mention that such levels are painfully high;
• Bund yields are a down a few bps or so while Le Spread – France versus Germany 10y – is contained. At 154bps, Le Spread is 20bps or so below the highs while the euro is off the lows versus both the greenback and the Swiss franc;
• Besides the ECB, we have US economic data on tap, including PCE inflation figures. The PCE data will show that underlying inflation remains hopelessly stuck at three percent.

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