EMEA Strategy Daily

Evelyne Gomez-Liechti | Multi-Asset Strategist (Mizuho International Plc) |

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USD rates start the week under renewed pressure, with Brent back above $106pb after Gulf states postponed talks with Iran and Saudi Arabia shut its East-West pipeline following a drone attack. With the Houthis also controlling Bab al-Mandeb, the risk has shifted further towards a double-chokepoint scenario. This will likely keep the upside pressure in energy prices and the bearish duration impulse alive today, particularly with little on the calendar to distract markets from energy prices (unless we get headlines on when the Iran-Gulf states meeting will be held). Despite the upside pressure in energy prices, USTs twist-steepened overnight, with the front- end trying to hold onto last Friday’s “consolidation” gains. Following the stronger CPI report, the market now prices an 86% probability of a Fed hike on Wednesday and more than 90bp of tightening in the year ahead. Mizuho now expects at least two hikes in 2026, with risks skewed towards more and a potentially front-loaded cycle. The key question on Wednesday is therefore no longer whether the Fed hikes, but how strongly the dots validate the market’s move towards 75bp of tightening in 2026 and whether October is brought more explicitly into play. Given the energy and Fed backdrop, we remain cautious on duration into the meeting. A hawkish Fed and further upside in oil could drive 10Y UST yields towards 5%.

EUR rates enter the week facing another leg higher in energy prices. Lagarde’s warning that the inflation shock may prove longer lasting reinforces the near-term hawkish bias, but it does not resolve the tension between higher energy inflation and the demand destruction that would follow if Brent remains above $100pb – a theme that in our view is being shrugged off when discussing ECB pricing. Today’s calendar is limited to Schnabel, Cipollone and Lagarde. The front end can remain under pressure while oil rises, but weaker growth should eventually limit how far markets can extend the terminal-rate repricing. The question here is whether there is appetite to take the other side (i.e., long side) of the market given the uncertainty. Our relatively more dovish view vs market on ECB makes us cautious about chasing Bund yields higher after last week’s washout (10Y Bund yields now above the key 3.50% level). France remains the weak link. Plans for around €30bn of budget savings may help at the margin, but the combination of weaker growth forecasts and a politically difficult fiscal adjustment argue against fading OAT underperformance.

Gilts face the busiest domestic calendar, with labour-market data on Tuesday, CPI on Wednesday and the BoE decision on Thursday. Oil raises the hurdle for the MPC to look through near-term inflation, while the market already prices November as a full hike and assigns some risk to a move this week. We think the MPC will remain on hold, with a 6-3 vote split, although acknowledge that the front end remains vulnerable if wages or CPI surprise higher. The BoE’s QT decision will also be in focus. Consensus looks for the annual runoff pace to fall to £50bn from £70bn, with a 40/40/20 split. We see risk of a smaller envelope (no active QT). A smaller programme should be supportive at the long end. Given the upside energy price pressure, the risks in the near term remain biased towards higher front-end rates and further flattening. Beyond the data and MPC, however, the asymmetry increasingly favours receiving once the market has completed the front-end repricing. In line with the Eurozone, the UK is particularly exposed to the growth consequences of another sustained energy shock, with labour demand already loosening and the economy starting from a weaker position than in 2022.

Mixed session in Asian equities, with the geopolitical backdrop and rising oil prices offsetting the positive lead from last Friday’s US session. JGBs bear-steepened likely in anticipation of tomorrow’s 20Y auction.

Multi-Asset Strategy Daily Mizuho International Plc…