AFS Markets Blog: Midday 19/10/2026

• Meanwhile in markets, Bunds and UST yields are stable while French government bonds are lower as the civil unrest weighs heavily on OATs. Oh, and perhaps we can lazily blame France for lower European equity prices too;
• Around noon Bund yields are basically flat for the day, ditto for US Treasury yields. OAT yields are up 5-9bps across the curve. A 147bps, Le Spread is inching closer to the intraday high (or should I say wide) of 159bps October 2. BTP yields – Italy had its own protests to content with – are up 5-7bps across the curve. I need not to remind you that it’s not just France holding elections next year. Italy must hold general elections before year-end 2027;
• In equity space losses for European indices are in the order of one to one and a half percent. Clearly, no reprieve from the sell-off in AI stocks having ended (for now at least). Predictably, the CAC is underperforming with 1.4% decline. That puts the CAC back into correction territory, albeit barely with a 10.5% decline from the peak;
• EURUSD has rebounded to 1.122, thus erasing its opening losses. It’s the same story with EURCHF, which plunged below its 200-DMA at 0.9239 earlier in the session before rebounding slightly above Friday’s close;
• The Kremlin floating Yalta 2.0 be damned – a trilateral between President Putin, President Trump, and President Xi – the pain from higher energy prices isn’t going away. Brent crude futures prices have erased most of their opening losses and are approaching the $110 handle. At nearly 90 euros per MWh, Dutch natural gas futures prices are trading at their highest level since the 2022 energy crisis;
• And speaking of Yalta 2.0, already plenty of ink has been spilled on President Trump giving up Ukraine to appease President Putin, and with China’s President Xi Jinping brokering the deal. The fear is that Beijing moves on Taiwan next, either because of an understanding with Trump, or simply because it pays to be the aggressor – re the US sacrificing Ukraine. But what would Trump get out of this? Be left alone in the Western Hemisphere – where the US is already dominant? Lower energy prices? But what’s the point if the Republicans already lost their Congressional majority after the midterms? Perhaps it’s Beijing and Moscow pressuring Tehran to cut a deal with the US. But that’s assuming that they hold leverage over Iran in the first place. And regardless, does Beijing really want to be seen as brokering the sell-out of Ukraine? I am not so sure. In any case, I am rather skeptical of the Yalta 2.0 trial balloon that the Kremlin has floated;
• Elsewhere, we see that when the French protest, riot, and loot, even Portugal sees its Bund spread widening. We can’t stress this enough, but Portugal isn’t just another over-indebted Southern member state. On the contrary: fiscally speaking, Portugal is what the Netherlands and Germany used to be last decade. The government targets a primary budget surplus of 2.6% of GDP next year, up from about two percent of GDP this year. Try finding such saintly budgets up north – or anywhere else in the world for that matter. Because of Portugal’s consistent surpluses, debt-to-GDP fell below 90% over the course of this year. And fall by several percentage points more next year;
• Portugal isn’t a story of tight fiscal policy decimating economic growth. According to last week’s IMF forecasts, GDP will expand by about two percent this year and next year. Which nearly double broad Euro Area GDP growth
• Finally, ECB ESTR pricing has sagged further, and rightfully so. The price to watch is the ECB-dated ESTR for the March 2027 Governing Council meeting, which had priced in more than a quarter point hike. At 2.93bps (down 4bps for the day), we’re not yet priced to perfection. I have penciled in a December quarter point hike, bringing the deposit rate to 2.75%. But, given the reluctance of ECB-speakers to raise rates or even call a spade a spade (you won’t hear them talking about a rate hike cycle), pricing should reflect odds of a hold;
• I see Euro Area core inflation peaking around 3.0% around the time of the March meeting. Which kind of pressures the ECB to raise rates again. But if core does indeed peak in the spring, there’s reason to believe that the ECB could hold rates. In any case, OIS still price another hike to 3.25% a year from now. Which, however far away it may seem, I don’t see happening;
• Looking ahead, today’s calendar is uneventful, as is the calendar for the remainder of the week. Focus will be on the usual drubbing of headlines from Iran and France these days, where the budget for next year is debated. Friday’s Euro Area preliminary PMIs for October should show that growth has remained resilient, but with price pressures worsening.