Bank of America upgraded French equities to overweight even as the gap between French and German bond yields reached its widest level since the 2011-12 euro zone debt crisis. The bank stays negative on the broader European market and forecasts a further decline in the STOXX 600.
Bank of America upgraded French equities from marketweight to overweight, citing their sharp underperformance and its rates strategists' view that the OAT-Bund spread has limited room to widen further. The move comes as political uncertainty in France and higher global yields pressure the country's public finances.
French spread hits highest level since the debt crisis
According to BofA, the spread between French and German 10-year government bond yields has widened to 140 basis points, its highest since the euro zone debt crisis of 2011-12. The bank says the increase reflects both rising global bond yields and political uncertainty in France.
BofA's rates strategists expect the spread to stay within a range of 100 to 150 basis points. However, a swift move toward the upper end would increase the likelihood of policy backstops, including potential European Central Bank intervention.
BofA blames US real yields, not France, for most of the STOXX 600 decline
European equities have so far remained largely resilient to concerns about France's fiscal position. The STOXX 600 has fallen around 5% from its August record high, but BofA attributes most of that decline to a 50-basis-point rise in U.S. 10-year real bond yields rather than French fiscal risks.
Still, the bank forecasts a further 7% decline in the STOXX 600 to 580 by the second quarter of 2027. It points to concerns about the sustainability of the artificial intelligence capital expenditure boom, which it sees as a potential risk to market expectations and corporate earnings.
BofA turns less negative on Europe, not bullish
BofA raised its stance on European equities from underweight to neutral relative to global stocks. The bank said the equity risk premium remains near a 20-year low, supported by strong global economic growth and continued upward revisions to earnings estimates.
Its stance on France rests partly on the view that much of the fiscal risk is already reflected in valuations. BofA also downgraded software stocks to marketweight from overweight after the sector outperformed by 30% since the summer.
Source: Investing.com
Trading involves risk.
Risk Disclaimer
