Mizuho EMEA Multi Asset Strategy Daily

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USTs ended little changed yesterday, after a decent oil-led rally earlier in the week. We had some initial selling pressure, but USTs recovered as oil traded heavy while the QRA delivered no surprise, with coupon sizes left unchanged and US Treasury repeating the “at least the next several quarters” guidance. The data was mixed, with ADP softer, ISM services a touch below expectations, but prices paid higher and employment lower. However, none of the data releases changed the rates narrative. The market remains more focused on whether the latest Iran/Oman headlines are the first step back to the negotiating table. Overnight, the news flow remained supposedly constructive, with Iran and Oman working on a 60-day arrangement for the Strait of Hormuz. The deal would exclude tolls during that period, but it does not prevent Iran from trying to charge tolls afterwards. This is a de-escalation step, but not necessarily a clean solution. With the US not directly part of the Iran/Oman talks and Iran still linking safe passage to the US blockade, I am not sure this is the smooth end to the conflict the market is trying to price. Moreover, Iran said that they will not accept “foreign interference in the Strait of Hormuz”, which reiterates their defensive position vs the US, and headlines about Israel striking Lebanon continued overnight, which may push Iran to add more demands. For now, the market seems to be reacting to a lower chance of near-term re-escalation though, but momentum is slowing down. Oil has found a floor, with Brent just below $80pb. Today should be relatively quiet, with jobless claims, and ULCs ahead of payrolls tomorrow. Unless oil breaks meaningfully lower again, the rates bid probably becomes harder to extend.

EGBs also remain largely a function of the oil/SoH. Bunds opened with a positive tone yesterday, but the move faded as the market waited for something more concrete on the Iran/Oman deal. The late headline that a joint statement was in the final stages helped bonds recover a little, but it was not enough to generate a cleaner rally. Spreads were slightly wider, with France and Italy underperforming, and Italy also facing the extra fiscal noise around the possible use of the EU escape clause for energy and defence spending. Today should be more active, with Spain and France issuing bonds and a reasonably busy data calendar, including Eurozone retail sales. But again, the domestic story is probably secondary, and it looks like, absent any further development in the ME and oil, Thursday is likely to be a consolidation day for EUR rates.

Gilts also remain mostly hostage to the same Middle East/oil headlines. Yesterday’s price action was relatively contained. The domestic data was not really the driver, even though the final services PMI was revised higher to 52.1 and suggested some improvement in activity and softer input cost pressure. The bigger UK issue is that Gilts are trading with two overlays: the global oil/inflation channel and the local fiscal risk premium. The Times story around a possible borrowing push and more infrastructure spending seemed enough to ensure the out-steepening of GBP rates vs USD, suggesting that the Budget and Gilt-supply story remain alive in the background. For today, there is little domestic catalyst, so Gilts should continue to follow oil and USTs ahead of payrolls.

Sluggish session in Asian equities, struggling for direction in line with moves seen in US stocks on Wednesday. The big highlight was the 30Y JGB auction, which was in-line with expectations but brought decent follow-up buying in the ultra- long end. That buying ensured the rally in 30Y JGBs and the bull-flattening of the JGB curve.

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