European Equity Strategy: Will rising French bond spreads disrupt the equity rally?

This report is BofA's European Equity Strategy note asking whether rising French bond spreads will disrupt the equity rally. The French OAT-Bund 10-year spread has widened sharply from around 85bps to 140bps, the highest since the 2011/12 Euro area crisis, driven by a sharp increase in global bond yields and French fiscal and political noise. BofA rates strategists expect the OAT-Bund spread to stay in a 100-150bps range, with a swift move towards the upper end raising the likelihood of backstops (including ECB intervention) being triggered. On strategy, the team remains negative on European equities outright, projecting a further 7% downside for the Stoxx 600 to 580 by Q2 given concerns over the sustainability of the AI capex boom. However, they lift European equities relative to global equities from underweight to neutral, and upgrade French equities from marketweight to overweight on recent sharp underperformance and limited further upside for the OAT spread. They also lower softwar