“Global economic activity is expected to maintain solid momentum in 2026, as uncertainty fades while policy remains supportive. ECB President Christine Lagarde’s now familiar refrain of ‘we are in a good place’ does more than sum up the eurozone outlook; it offers an effective snapshot of the global economy at large,” says Luigi Speranza, Head of Markets 360 and Chief Economist.

Benign economic backdrop to 2026

Markets 360 believes that the central theme of its Global Outlook Q4 2025 – resilience – remains firmly in place.

Healthy growth momentum: Markets 360 sees a continued solid pace of activity worldwide as existing strength is buoyed by further expected rate cuts in the US, China and several emerging markets, as well as additional fiscal stimulus in the eurozone and Japan, deregulation, and AI-related investment plans.

Eurozone upside potential: Markets 360’s most pronounced non-consensus view is on the eurozone, where the team expects activity to outpace market expectations. It projects 2026 GDP growth of 1.5 %, reflecting confidence that fiscal stimulus – primarily in Germany – will be implemented swiftly and prove more effective than consensus estimates suggest.

Inflation slowing but not vanishing: The team expects inflation to keep slowing in 2026, but not enough to remove the risk of persistent above-target dynamics. The US and Japan exemplify this pattern: in both economies, inflation is still above target, and Markets 360 projects it to stay there throughout its 2026–27 forecast horizon.

An AI-driven productivity boost should be disinflationary in the long run. In the near term, however, defence spending, AI-related pressures on power prices, and a focus on strategic independence at the expense of efficiency are likely to exert upward pressure on prices, the team thinks.

Deflationary pressures look set to slow but persist in China, as the authorities continue their ‘anti-involution’ campaign while also seeking greater technological self-sufficiency.

Disinflation trends look set to continue across emerging markets, supported by moderate GDP growth, FX appreciation and relatively stable commodity prices. Nonetheless, Markets 360 identifies several upside risks to this view in its report.

End of easing cycle draws near: With policy rates still generally above its estimated neutral level, the team continues to see more scope for modest cuts than for tightening across most economies during its forecast horizon.

Exceptions include the eurozone and Japan. The ECB’s next policy move is predicted to be a rate hike, according to Markets 360, although the team’s revised inflation outlook means it expects it only in the second half of 2027.

The Bank of Japan remains well behind the curve; the team anticipates three incremental 25bp hikes by the end of 2026, a shallower tightening than required for an economy that is running well above potential.

Markets in expansion regime: Markets 360’s base case for the global economy remains consistent with the expansion (E) regime of its BERT market regime analysis framework, which tends to be pro-risk, bearish duration and USD-negative. In keeping with this pro-risk view, BNP Paribas Cash Equity Research sees equity markets reaccelerating following the current consolidation phase, while Credit 360 remains bullish credit, with key opportunities in the High Yield sector.

Steepening tide for bond markets

Higher back-end rates despite a supply peak: In the US, Japan and the eurozone, the long end of the curve is set to sell off, and Markets 360 expects curves to steepen further even though it sees net G4 issuance falling by roughly 16% in 2026 versus 2025.

Supply still historically high: G4 issuance in 2026 will remain the second-largest on record, driven primarily by a surge in German sovereign supply that Markets 360 conservatively forecasts at EUR130bn, four times the 25-year average and 30% above the 2025 level. Core duration in Europe is therefore the sector the team is most bearish on, even as it maintains a positive view on euro government bond spreads.

Softening demand for long end: Eurozone long-term demand is affected by the Dutch pension fund transition, while Japan faces limited capacity to buy among life insurers. These trends could be reinforced by the risk of upward inflation surprises, particularly in the US, where fixings are rather low, and in Japan, where fiscal and monetary policies support an economy that is already above capacity.

Political risk clouds UK’s positive duration picture: Absent the current political uncertainty, the UK would stand out as the only developed market that is duration overweight, due to a more positive supply picture (fiscal consolidation and QT slowing), lower inflation and likely further BoE rate cuts. A potential leftward shift in the government, however, could muddle the picture by signalling a weaker commitment to fiscal tightening. Markets 360 yield forecasts therefore embed a sustained political risk premium.

EM duration more appealing: Market-priced rates sit above the team’s neutral and terminal rate estimates, leaving room for more rate cuts, particularly in CEEMEA and Latam. Private consumption growth remains below historical norms, limiting inflationary pressure, while cheaper Chinese input prices are pulling down import price inflation across many EM economies.

Commodities and currencies

Oil range-bound with a geopolitical kicker: Markets 360 projects Brent to slip in Q1 2026 before a modest rebound in Q3. The downside risk is driven by rising supply; the upside hinges on the escalation of geopolitical risk (e.g. sanctions on Russia or conflict affecting the Strait of Hormuz).

Mixed USD performance: After a year of broad weakness in 2025, the USD is likely to see a more balanced trajectory in 2026. Reduced hedging flows and continued AI-driven equity inflow into the US could support the currency even as demand for Treasuries eases.

Modest support to EUR from growth: Above-consensus eurozone growth should support the EUR – the team expects EURUSD to edge higher, albeit only slightly above forward levels.

Carry sweet spot for EM high-yield FX: As investors chase yield in a broadly supportive macro environment, Markets 360 expects the USD to lose ground against EM high-yield currencies, while maintaining relative strength versus Asian FX.

Lower FX volatility the base case: A carry-supportive backdrop is bearish for FX vol, but next year’s elections in Brazil and Hungary represent idiosyncratic risks, and campaigning for the November midterms might reignite policy uncertainty risk in the US, potentially pushing up vol risk premium.

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