Highlights

• Social unrest and street protests have erupted across many cities in France and Italy. Ironically, 10-year government bond yields across the Eurozone have eased 19bp to 3.40% in October due to tightening of monetary policies by central banks and the pullback in AI funding.
   
• Yield spreads for S-REITs have expanded by 29bp to 4.06%, which is 2SD above long-term mean, as unit prices and 10Y Singapore bond yield pulled back concurrently in Oct 26. We cut DPU forecast for FLT by 1.5%, CLAS by 0.7%, KDCREIT by 0.3% and LREIT by 0.3% due to weakness in the euro.
   
• Maintain OVERWEIGHT. S-REITs remain defensive and resilient. BUY CICT (Target: S$3.11), LREIT (Target: S$0.80), MPACT (Target: S$1.67), NTTDCR (Target: US$1.29) and UIBREIT (Target: S$1.16).
   

Analysis

• France trapped in a vicious cycle. France has been trapped in a political gridlock since the parliamentary election in mid-24 led to a split parliament. Prime Minister Sébastien Lecornu has struggled to secure parliamentary support for a 2027 budget seeking €54b in savings. France has the highest budget deficit at 5.5% of GDP in the Eurozone. Opposition to spending cuts has cast doubts on the government’s ability to deliver fiscal reforms. Thus, France’s 10-year government bond yield rose 139bp ytd to 4.95% in Oct 26, its highest level since 2002. The premium over German bonds has also widened sharply to 153bp. Student protests have erupted over underfunded schools. These pressures create a vicious cycle in which delays in deficit reduction and higher financing costs result in additional austerity, which fuels further social unrest.
   
• The UK has highest bond yield among G7 countries. The UK’s borrowing in the first five months of the financial year was £7b above the Office for Budget Responsibility’s forecast, including £2b in higher-than-expected debt interest. The rising government bond yields and increased debt-servicing costs have reduced room for additional spending in the budget to be unveiled in Oct 26. The government wants to help low-income households defray higher energy bills. To fund the higher expenditure, the Exchequer intends to raise the surcharge on banks’ profits, which affects the competitiveness of the financial services industry. The 10-year gilt yield rose 93bp ytd to 5.41% in Oct 26 due to higher energy prices and stretched public finances. Higher yields lead to higher mortgage and corporate borrowing costs, which weakens demand.
   
• The euro has weakened against the US dollar and Singapore dollar amid rising energy costs, concerns over France’s public finances and stronger demand for dollar assets. It depreciated 4.3% against the US dollar and 5.3% against the Singapore dollar on a ytd basis in Oct 26. Sentiment remains fragile due to fears of financial stress in France spreading across the Eurozone. Europe’s energy shock threatens growth and adds to inflation worries, outweighing support from the European Central Bank’s rate hikes. The weaker euro raises the cost of US dollar-denominated energy imports, complicating the ECB’s task of containing inflation and safeguarding financial stability.