Strategy Daily

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

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Open Mic Week Meets Geopolitics. The focus now shifts away from data and back towards policymakers, with Fed speakers finally emerging from blackout into a market that is pricing roughly 33bp through year-end. The more immediate challenge remains energy. While crude is softer overnight following reports of constructive US-China discussions ahead of the Trump-Xi meeting and a quieter Asian session, the broader Middle East backdrop remains tricky. Houthis continue to expand operations against Saudi-backed forces, attacks on Riyadh reinforce the regional escalation risk, and both Washington and Tehran continue to signal little willingness to compromise on key conditions for ending the conflict. Meanwhile, tanker shortages and elevated shipping costs through Hormuz suggest that, even if crude stabilises, energy-related inflation pressures may persist for longer than policymakers would like. Macro-wise, besides Fed commentary, we will be attentive to PMIs and UST supply. All eyes remain focused on that 5% level in 10Y UST yields. So far, it has held, but we suspect that, until oil materially turns lower or activity data softens meaningfully, rallies are likely to remain tactical rather than structural. FX-wise, the DXY rebounded from Friday's lows and is trading around 100.35. For now, elevated energy prices and a still- hawkish Fed continue to provide support.

France Becomes the Story Again. The market has spent much of the summer focusing on energy, but France has now become a story in its own. The move through 100bp in OAT-Bund spreads last Friday suggests that investors are increasingly treating France as a fiscal and political problem rather than a temporary volatility event. Valuation is becoming attractive, but attractive valuations are rarely enough when investors cannot identify a catalyst to stop the widening. The cherry on top was the downgrade from AA- to A+ from Scope. This week's focus shifts to two political developments+ ECB. First, whether RN continues to harden its stance ahead of budget negotiations. Second, whether Germany's regional election fallout develops into a broader challenge to Merz's authority. Our base case remains that Merz survives, but the leadership meetings this week will be closely watched by markets looking for signs of further political instability at the core of Europe. From an ECB perspective, policymakers are becoming more open to further tightening should energy prices remain elevated, but we still think current terminal-rate pricing looks too high relative to the medium-term growth outlook although the hawkish momentum is hard to fade. The October ECB meeting is priced around 55-45% probability in favour of a hike and we wonder whether this week’s PMIs will continue to follow the Q2/summer rebound narrative that is allowing terminal rates to keep rising. EUR/USD weakened modestly overnight and is trading around 1.1475.

Higher for Longer, But How Much Higher? Our question for GBP rates is whether markets are getting ahead of themselves. SONIA repricing has been aggressive, front-end yields have adjusted sharply (100bp priced until Jul27) and the curve continues to flatten following the BOE's QT announcement. Like elsewhere, the debate is increasingly shifting from whether additional hikes are possible to whether the market can realistically sustain current terminal-rate expectations into 2027. This week is relatively light on data, leaving PMIs and BOE speakers as the main focus. We suspect officials will continue emphasising inflation risks, but the bigger challenge may be convincing markets that a prolonged period of highly restrictive policy can coexist with below- trend growth (we don’t think so). GBP/USD is trading slightly off recent highs around 1.3377.

Risk-on start in Asian equities, with tech stocks, slightly lower energy prices and positive comments from Bessent around the US-China talks driving the move. It was an otherwise quiet session, with Japanese markets…