CITIC SEC: Is the European debt crisis recurring?

CITIC SEC: Is the European debt crisis recurring? CITIC SEC released a research report stating that the center of gravity of European sovereign credit risk is shifting from "peripheral countries" to within "core countries." As of October 2026, the France-Germany 10-year government bond spread has risen to 150.3bp, at the 99.8th percentile since 2001 and the highest since the 2011 European debt crisis; the France-Italy spread has unusually turned positive to +39.8bp, with French yields overtaking Italian yieldsa rare structural break since the founding of the euro area. The DRIVE lies in the energy supply-side shock triggered by the Middle East war, which pushed up inflation and forced a policy pivot by the ECB, compounded by France's structural fragility of "high unemployment + high deficit + high debt" and the V-shaped reversal in its debt interest burden, causing France to be systematically repriced within the core countries. However, the euro area banking system has ample capital and liquidity buffers (CET1 at 16.0%, LCR at 154.9%), and the sovereign credit-bank negative feedback loop has not yet formed; the current situation remains a "repricing" rather than a "crisis." Compared with the US, the two countries' fiscal book fragility is similar, but the US, with a stronger growth center, lower private-sector leverage, and the dollar's reserve currency status, has relatively higher debt sustainability. We judge that this round of spread widening has "France specificity" rather than being a systemic repricing of global sovereign credit. Overall, however, against the current backdrop of rising investor concerns about developed-market fiscal positions, gold may still offer trading opportunities. Amid slowing AI CAPEX, ongoing geopolitical conflicts, and sovereign credit disturbances, we recommend maintaining patience with both Hong Kong and US equities; November may bring better allocation opportunities. The main views of CITIC SEC are as follows: The epicenter shifts from "peripheral countries" to "core countries": the France-Germany spread rises to the highest since 2011, and the France-Italy spread unusually inverts As of October 20, 2026, the France-Germany 10-year government bond spread has risen to 150.3bp, at the 99.8th percentile since 2001 and the highest since the 2011 European debt crisis; the France-Italy spread has turned positive to +39.8bp, with the French 10-year yield (4.92%) overtaking Italy's (4.53%)a rare structural break since the founding of the euro area. Notably, France's absolute yield ranks only at the 66th percentile across history, yet its relative premium is at a historical extreme; the market's repricing of France is essentially a "relative divergence within the core countries." The energy supply-side shock pushes up inflation and reverses the ECB's path; France's structural fragility and the V-shaped reversal in its interest burden make it the epicenter The energy shock triggered by the Middle East war pushed euro area HICP up to 3.8% (at a historically high percentile), and the ECB raised rates twice, in June and September 2026, to 2.50%; meanwhile, France is being repriced under its identity of "core-country status + peripheral-country symptoms"its unemployment rate of 8.2% and deficit ratio of -5.1% are both the highest among major euro area countries, and interest expenses as a share of GDP have rebounded from a 2020 low of 1.3% to 2.2% in 2025. Passive fiscal deterioration compounded by political fragmentation amplifies its repricing pressure. On the boundary, the banking system has ample buffers, and the sovereign-bank negative feedback loop has not yet formed; the current situation is "repricing" rather than a "crisis" Euro area banks' CET1 stands at 16.0% and LCR at 154.9%, and together with the ECB's TPI, OMT, and other tools on standby, these constitute the key buffers preventing this round of repricing from evolving into a systemic crisis; the current situation is closer to "normalization of risk premiums" than a solvency crisis. US fiscal positions are likewise under pressure but more sustainable than France's The US debt ratio is 122.6% and its deficit ratio -5.8%, even higher than France's, but given its growth center, lower private-sector leverage, and the dollar's reserve currency status, its debt sustainability and investor confidence are relatively higher than France's. We judge that this round of spread widening reflects a relative deterioration in France's credit rather than a systemic repricing of global sovereign credit. Overall, however, against the current backdrop of rising investor concerns about developed-market fiscal positions, gold may still offer trading opportunities. Hong Kong and US equity outlook: maintain patience amid AI CAPEX, geopolitical, and sovereign credit disturbances US equities: As the midterm elections approach, the two parties' wrangling over AI regulation and data center construction is intensifying, compounded by expectations that the US and Israel may resume strikes on Iran; we believe US equities will continue sector rotation in the short term, with capital expected to switch from AI themes to energy, defensive daily consumer staples, and healthcare, which may benefit from expectations of a Democratic sweep in the midterms. Hong Kong equities: Weighed down by AI CAPEX, geopolitical, and sovereign credit concerns, Hong Kong equities fell notably this week. The forward P/E of the Hang Seng Index and the Hang Seng Tech Index have narrowed to 9.6x and 13.4x, respectively, with the latter already below the bottom level for Hong Kong equities after the "reciprocal tariffs" outbreak on April 7 last year. If a series of new domestic property policies can improve household wealth expectations and drive a recovery in domestic demand, and third-quarter results confirm an earnings inflection point, we judge that mid-November is a good time to allocate to Hong Kong equities. In the short term, besides dividend sectors such as utilities, telecommunications services, and banks, we also suggest watching: 1) consumer electronics, where short-selling ratios remain high but which may benefit from a reversal in overseas AI hardware trading; and 2) CXO and innovative drugs, where falling risk-free rates lower financing costs and which may benefit from expectations of a Democratic sweep. Risk factors Euro area inflation rises further above expectations; the ECB's rate hike magnitude and pace exceed expectations; global long-end rates rise more than expected; global geopolitical conflicts escalate again; historical data cannot represent future performance, etc.