Global Asset Allocation

24 Sep 2026 22:44:40 ET │ 37 pages

Global Asset Allocation

House Views September 2026: Rates Bite, Equities Fight

CITI'S TAKE

In equities, we stay overweight — We favor the US as the AI narrative remains strong. We have capacity to add to equity risk, and emerging Asia is a candidate, but prefer to buy the dip as there is usually some indigestion after first Fed hikes and into midterms. In rates, we stay neutral duration — The sell-off in duration is extended, but volatility is rising and the time to buy duration is towards the end of the hiking cycle, not at the beginning. We stay overweight EM (now FX hedged), versus Europe (core and periphery). In credit, we stay underweight — Credit remains a hedge for our equity overweight, as issuance by hyperscalers will remain substantial. In commodities, we remain overweight base metals — We are neutral on energy, as there are also downside risks. We remain long base metals given strong global growth momentum. We cut our gold long earlier this month on rising US rates. In FX back to neutral — We FX hedged our EM local position, given that our volatility warning triggered, driven by US rates volatility. In illiquids, we stay long uranium and add a position in sugar.

House Views September 2026: Rates Bite, Equities Fight

Still long in equities, add risk on pull-back. We tactically reduced our equity risk in early July by cutting emerging Asia, but we are staying overall overweight, driven by the US. We are impressed how well the equity market has been trading in the light of higher oil, higher rates, and poor seasonals in Sep, even at a time when volatility in US rates is rising. Therefore, we stay the course but patiently wait for a pull-back to add more risk because a pullback is typical after a first Fed hike (rather than before) and because the market also tends to pull back into the midterms before the typical year end rally takes over. We prefer the US as we still believe that the AI trade will continue. Emerging Asia is the other candidate, and an attractive candidate when the time comes to add more risk. The US is also more insulated from renewed oil upside. Staying neutral duration, long EM, short Europe (core/periphery). Duration has suffered from hawkish front-end repricing from the Fed, ECB and BoE, coinciding with higher oil prices. The US front end has suffered from a hawkish Jackson Hole, a hotter than expected CPI and September FOMC. At this stage, it is unclear to us what it will take to stop a hawkish Fed. While the FI sell-off is extended, the market is not pricing a 1999 type cycle either, which has become more plausible (though not the base case). Extended positioning and high uncertainty with respect to oil stop us from an underweight. We stay long EM (which also has a 10% China weight, the only global bond market that is largely immune to the sell off), against a short in Europe (both core and periphery), where the upcoming French election adds to the risk profile. We take Gilts back to neutral, as it may be the central bank where the market priced aggressive hikes versus what the central bank is suggesting. We reiterate our IG credit underweight. We remain underweight in both US and EU IG credit as a hedge for our equity overweight. Plentiful issuance has led to a pullback in spreads, but with supply not cresting yet, credit still screens as a good hedge. Stay long base metals in commodities. We remain neutral on energy, given that our commodity strategists still see oil eventually lower, even with short-term risks to the upside. We remain long base metals as global growth momentum remains very strong, and base metals have historically been immune to higher rates. We cut our gold long earlier this month, as US rates are the single most important driver for gold. Neutral in FX. We had made the case that EMFX carry should trade well even with rising US rates, as long as rates volatility stays subdued. With US rates volatility now rising, our warning indicator triggered and we bring the EMFX allocation back to neutral, leaving us overall neutral FX. Moderately risk on. Overall, we remain moderately risk on, with some hedges.

Previous portfolio update Source: Citi Research

Cross-Asset Considerations

Staying Long Equities

We continue our equity overweight. We have made the case to stay invested in equities given that fundamentals still appear strong. While prices clearly peak before fundamentals by at least 6m or so, neither liquidity nor sentiment measures are in line with a major market top. Instead, the market is likely to continue to climb a wall of worry. The most recent worries have been related to a renewed flare up in the Iran war and only partially related to that, rising interest rates. On the more equity centric side, the potential for pacing the AI research efforts has added to concerns. While we will address all those concerns below, we would note that it is a very positive sign that the SPX is still so close to its highs despite those negative factors playing out. Furthermore, all this is happening in the month of September, a famously tricky month, seasonally speaking. We therefore keep our bullish positioning, with scope to add more risk over the next few weeks.

Iran concerns are difficult to dispel, but equity markets find it the easiest to decouple. The situation in Iran has been a headwind for many investors, mostly because there were many false starts to end the war. But even without an obvious way out, oil prices have not made new highs. Citi commodity strategy suggests that short term stress is still very plausible, even as by the end of the year, the SoH is likely to be open for business again, pushing oil prices back down to $70/bbl by Q4 assuming a reopening (Global Commodities - SoH and El Nino present upside risks to commodities & inflation; structurally bullish metals themes expected to shine through). But the path from here to there is cloudy to say the least. Given extended uncertainty on the Iran front, it is somewhat reassuring that equity markets seem to care the least across asset classes. As can be seen in Figure 2, the correlation with both front ends and back ends in the rates space is extremely high, the correlation of the USD is reasonably high, but equities dance mostly to their own tune, especially in the US (illustrated in Figure 3).

Equities climbing a wall of worry. We would also note that the resilience of equities in the light of a continued Iran war as well as more hawkish central banks /rising rates, has been comforting. While much has been written about how higher rates may impact equities, this has so far barely happened. Of course, volatility is slowly picking up, and we always had the view that it takes higher rates volatility the Move Index on the move, risks to equities may be rising. Furthermore, we have been open to the idea that equities pull back around or slightly after the first Fed hike. Again, so far this has barely happened, which we see as encouraging, although we may have to wait for another few weeks before we are in the all-clear on that front. But the point is that both Iran and Fed hikes are now well understood, and the market has not reacted much, signaling underlying strength. Furthermore, September seasonals are famously negative, and we will be running out of this headwind in another week, even though October is also somewhat mixed, with November and December showing the big improvements.

AI story on track, keep overweight in US. More US specific, the other wall of worry has been the “pacing” story, where leading AI labs suggested to slow down on training new models in the light of safety concerns. Clearly, a moratorium of training would free up much compute capacity, at least in the short term, and would likely lead to a pullback in AI names. Having said that, this is not what has been proposed in terms of tapering. Instead, it seems more about adding outside observers into the model validation process. At the same time, additional compute resources may be required for additional alignment research. Maybe more importantly, President Trump came out strongly against major constraints on AI development. It may therefore require a more substantial accident than the “Hugging Face” episode (Reuters, 16 Sep), before more stringent regulation becomes more likely. While the likelihood of a more significant hacking episode may not be low, this is something quite difficult to trade given unclear timing. In the bigger picture, we would point out that excitement on physical AI is only starting to build, and computing resources needed for that build out are high. This is another reason to believe that the leadership of tech is to come back. We therefore prefer to stay overweight the US.

Adding more risk closer to midterms? While we are overweight US equities and have been for a while, we have capacity to add risk. But we would prefer to do this on a pull-back. We have noted in the past that there is typically a pullback ahead of the midterms. This is usually an opportunity to buy as the year-end performance tends to be quite strong. We would add risk on a dip, while keeping an eye on Iran.

President Trump has suggested peace may come only after the midterms, raising the risk that the military campaign could intensify beforehand.

Neutral Europe – stuck between energy risks and resilient economy. Europe has higher energy sensitivity than most to gas prices (Figure 7). However, Citi strategists point out some areas of resilience, from both the broader economy and regasification capacity. (European Equity Strategy Multi-Asset - European Equities and the Natural Gas Price Shock: Less Vulnerable This Time?). European gas storage stands at 67%, but storage alone understates the region's supply cushion. Factoring in un-utilised LNG regasification capacity lifts effective gas coverage to ~81%, essentially in line with the 10-year September average of 82%. Put differently, Europe retains substantial import optionality through existing LNG infrastructure, providing a meaningful buffer beyond gas already in storage. Even with pipeline import capacity running at >90% utilization, the remaining spare capacity could add a further 2-3ppt to effective coverage, taking the region above its long-term seasonal norm. For more on longer term the European investment into resilience, see Europe Multi-Asset - Protecting Europe.

When to care about French elections? Why not now? We studied various crossasset spreads into 2nd round of French elections going back to 1995 (5 samples). Most show no meaningful result, including FX (some mild weakness in EURCHF). CAC40 vs MSCI World is showing clear weakness well ahead of the election. This reinforces our bias to stay neutral European equities and UW duration (more on that later). For more on the French elections, see European Multi-Asset: 2027 Presidential Elections in France: Why they matter.

In EM Asia, fundamentals remain constructive but earnings momentum and positioning keep us on the sidelines for now. We stay in the camp of an AI boom with physical AI in the early innings and more adoption to come. This makes EM Asia in general, and Korea in particular, a good candidate to add risk again (after having cut it in early July), but we stay on the sidelines until there is clearer bullish momentum. At this stage, earnings momentum in Korea is beginning to roll over and the earnings cycle is no longer providing the same tailwind it did earlier this year.

Positioning cleaner, but not clean. The reason for the massive run up in equities earlier this year was due to massive retail leveraged positioning. While that has cleaned up somewhat, as per Figure 11, domestic retail investor exposure remains elevated and may have to come off further, before technicals are favorable again. We would look to add on dips or on more bullish news flow. The other parts of EM Asia show more divergence with Taiwan benefiting from the AI tailwind, illustrating what the underlying trend looks like without retail chasing. India likely remains an underperformer from earnings disappointments, foreign outflows, and lack of AI exposure.

Figure 10. GPU rental prices leading KOSPI, recently have been more volatile

Source: Citi Research, Bloomberg

Source: Citi Research, Bloomberg

Rates – Neutral duration, long EM local versus Europe

The Fed has turned hawkish. The story for duration has become much more complicated. Since the last GAA, the Fed has become meaningfully more hawkish. This started with a Jackson Hole speech that convinced investors that chair Warsh himself was hawkish (see Global Macro Strategy - Views and Trade Ideas - The Warsh Shadow Rate), mostly by highlighting the hawkish input into his reaction function, which we aggregated into a “Warsh shadow rate”, seen in Figure 12. This warning shot was followed by a higher core CPI (if only for some likely one-off reasons). The hawkish news flow then continued with a hawkish September FOMC, convincing investors that a hawk Warsh is in full control of the committee (after Governor Waller has sounded dovish pre CPI). At this stage, Citi economics is still calling for a one and done cycle. However, the market is debating whether the Fed will just reverse the last 75bp of cuts given that they were driven by unrealized labor market fears, or whether a full-fledged hiking cycle is needed given the current strength in the underlying economy. The market is pricing some combination of both, with nearly 100bp of hikes priced until the end of next year. This means that there is still upside risk to Fed pricing, especially if the labor market tightens and there is follow through in wages, while the inflation remains sticky. But at this stage, there are also downside risks, given that an end to Iran hostilities and the resulting oil price fall could remove some of the urgency and lead to a more gradual and shorter hiking cycle than currently priced.

Backend driven higher by more hawkish Fed. While there is a group of investors who believe that hawkish Warsh is what is needed to stabilize the backend, we disagree. The main driver for the sell-off in the backend is neither fiscal (see stable ASW), nor Fed credibility driven (see stable inflation expectations), but is really driven by real rates, which is due to strong growth prospects and capital requirements to fund such growth (see Figure 14 for a decomposition). Furthermore, the curve has flattened aggressively, also highlighting that the selloff in the backend is monetary policy cycle driven. Therefore, more caution at the front end translates into more caution at the backend of the curve, too. In the typical monetary policy cycle, the 10yr peaks roughly when the 2yr peaks and even the 30yr roughly peaks around the same time. This means that in spite of real rates now more attractive, at least on a medium-term horizon, we refrain from taking a

Source: Citi Research, Bloomberg

Why not an underweight? Clearly, we wish we had been underweight duration, rather than neutral for the last few months. However, at this stage there are two risks. First, an agreement with Iran and lower oil prices would presumably lead to a tradable rally, given just how important oil has been for G10 central banks, as well as fixed income price action. Second, we think that into early November, the US Treasury market may benefit from an expectation that Treasury Secretary Bessent will lower coupons. November is far away for the market, but more aggressive buybacks are a tool for Treasury Secretary Bessent on a shorter horizon. The neutral stance is in line with our US Treasury strategist, which recently changed their stance to neutral (US Rates Weekly - Only hawks outside the window).

Japan debasement trade running into GPIF? To recap, on 11 Sep, we took profit in various pro-Japan trades, paid 1y, long NKY and short USDJPY (5 bearish worries we are more sanguine on and 2 gamechangers). In doing so, we also moved to neutral JGBs and moved European core, periphery and gilts to UW as a riskweighted basket. Last week received long end rates in Japan in a hybrid trade (Global Macro Strategy: Fading JPY weakness: 6m USDJPY down and JPY 20y TONAR down dual digi). Overall, we think the combination of ongoing risk of further US-Japan coordinated FX intervention, GPIF increasing domestic bond allocations and improved BoJ credibility should support JGBs, at least in relative terms, if not absolute terms during a global duration sell off. While we added a longer dated bullish JGB structure last week in options space, the GPIF flows are difficult to time, and so we stay neutral in a more directional setting.

Stay UW in European core and periphery: clearest energy + fiscal hedge. European growth is resilient for several reasons (European Economics - Remarkable Endurance Likely to Continue), including strong household balance sheets, stockpiling, a synchronized capex investment cycle and limited downside for energy-intensive industries. This has led to positive economic surprises. Figure 19 shows that the regime of positive CESI (Citi Economic Surprise Indicator) in Germany and Italy is the worst regime for Bunds. Additionally, EUR 10y has one of the highest G10 rate sensitivities to Brent, after GBP. Finally, the ECB remains arguably the most hawkish central bank in G10, which adds monetary policy pressure not just to core rates but also fiscal risk to select EGB spreads, as shown in Figure 21.

Source: Citi Research, Bloomberg

European fixed income underperforms into French election. As already mentioned above, we studied various cross-asset spreads into 2nd round of French elections going back to 1995 (5 samples). In fixed income space, we find that Bunds vs USTs show clear weakness well ahead of the election.

Moving Gilts back to neutral. The BoE will be hiking soon but they seem less hawkish than the Fed and ECB. We received Nov/Dec MPC ahead of the BoE meeting as reflection of this cautiousness and maintain this position after the meeting. On the margin, the QT adjustments give flexibility for less longer dated issuance in the future as a maturity transformation (Gilt NCR won’t change). This is also tactically bullish for the long end. For more, see European Rates Weekly - A QT revolution.

Stay overweight EM local. We went overweight EM local last month, given inflation surprises that are still coming in soft, especially relative to global markets overall, as per Figure 23. Inflation surprises globally and in EM are back to negative using our Citi Inflation Surprise Indices, which is the best period for EM bonds. Structurally, we would also flag strong momentum in EM vs DM performance since 2023. We suspect this reflects better inflation fighting credibility via higher ex-ante real rates and less fiscal imprudence than G10. We would also note that CGBs have a 10% weight in the index, and CGBs have been the key bond market that was able to counter the higher rates trend. While a high volatility selloff in US rates is not good for EM either, the PNL is mostly driven by 2022, which is when our European underweight would also kick in (see Figure 25). EMFX has also been an important part of the attraction for our overweight. We have held this position FX unhedged. While crowding was fairly high in EMFX, volatility remained benign enough for it to not matter much. However, our EM carry warning signal triggered earlier this week, as per Figure 26, as fixed income volatility (MOVE) broke the 2 standard deviation level. We therefore switch to the FX hedged EM local index, with risk sizing in line with the EU underweight, keeping us overall neutral.

Source: Citi Research, Bloomberg

Stay underweight credit - Supply pressures collide with hiking cycle

We remain underweight US and European IG credit. Our core view on credit remains that elevated issuance, particularly from hyperscalers, should continue to exert further technical widening pressure on spreads. Hyperscalers’ issuance has materially increased this year and subsequently led to spread widening well above last year’s April peak (Figure 27). Our colleagues in credit continue to expect this

Grade Beat: The path forward for hyperscalers). We think this reinforces the case to remain underweight credit as a hedge to our bullish equity view, particularly as persistent supply pressures now coincide with a less supportive rates backdrop. As highlighted in Global Macro Strategy - Views and Trade Ideas: Higher yields are the price of resilience, we think the sequence of resilient G10 economic data, stubbornly elevated oil prices followed by hawkish central-bank decisions has now shifted the debate from whether the Fed’s (and other central banks) next move would be a hike/hold to how far and how long the hiking cycle may extend. Historically, we show in Figure 28 that this has been a challenging part of the cycle for credit. Our event study shows the first few weeks after the initial hike can provide brief relief as markets price in the tightening cycle. However, IG spreads have typically underperformed thereafter, with mean and median returns deteriorating more clearly 20+ trading days after the first hike. As such we prefer to remain underweight US and Euro IG credit here.

Source: Citi Research, Bloomberg

A repeat of 2022 is not our base case, but the stronger starting point does not remove the case for wider spreads. In European Credit Insights - Rates, REITs and Refis, our European credit strategists note that credit enters the current tightening cycle from a stronger position than in 2022. Under the hood, issuer quality has improved, as weaker borrowers have fallen out of the index, while companies have had more time to refinance and adjust to higher funding costs. That said, an important change over the past few years in credit markets has been the growth of fixed-maturity funds that are more willing to look past mark to market volatility which subsequently sees credit being increasingly framed as a yield product. We think that this poses a question for credit valuations and its decomposition. We show in Figure 29 and Figure 30 that much of the attractive all-in yield now comes from government bonds rather than credit spreads. Hence, if credit is increasingly treated as a yield and carry product, corporate bonds must still offer an adequate premium over government bonds to compensate for additional credit and liquidity risk. Therefore, while we think that a healthier issuer base should limit the extent of future widening, current tight spreads combined with rising supply and uncertainty over the length of the hiking cycle should leave the risk-reward skewed towards underweight both US and European IG credit.

Commodities – Long base, neutral oil and precious

Remain neutral on oil

Balancing near-term geopolitical upside risks against a more bearish mediumterm supply outlook in oil. Previously in Global Macro Strategy - Views and Trade Ideas - 5 bearish worries we are more sanguine on and 2 gamechangers, we discussed the potential risks/spillovers from oil markets to our broader macro outlook. Even at current inventory draw rates, our Commodities strategists estimated that OECD stocks would not reach critical levels until late 2027 or later (Cross-Commodity Outlook - Bullish gold and silver; ongoing ME escalation to continue before eventual 4Q26 de-escalation). While their base case envisages further Middle East escalation supporting oil prices in the near term, this is eventually followed by easing tensions and a reopening of the Strait of Hormuz in 4Q26. As such, this would take Brent towards $70/bbl by year-end and $65/bbl in 2027, given that the return of disrupted supply pushes the market into a larger surplus than before the conflict, at ~3–4mb/d versus ~2mb/d previously.

Figure 31. World total oil/products inventories would take until 2028 to reach levels consistent with the 2nd oil shock of the 1970s on their Feb–Jul 2026 trajectory (status quo) (from Cross-Commodity Outlook - Bullish gold and silver; ongoing ME escalation to continue before eventual 4Q26 de-escalation)

Neutral medium-term allocation, but some hedges in trading book. From an asset-allocation perspective, however, we think the wide distribution of potential outcomes argues against taking significant directional risk in oil. We prefer to allocate risk to assets with stronger structural support, including equities and base metals exposed to the AI investment cycle. Having said that, there are upside risks. In our Commodities team’s upside tail case, a sustained disruption to Middle Eastern flows could lift Brent towards $110–120/bbl, with damage to regional energy infrastructure presenting a more extreme upside catalyst. Conversely, an earlier reopening of the Strait would accelerate the return of supply and drive a sharper unwind in crude and refined-product prices. While we are retaining cheap upside oil hedges against an extended disruption (Global Macro Strategy – Correlation Corner - #9: Looking for US-Iran hedges), this is easier to implement in our trading book, where we can use options, rather than in GAA.

Are Chinese refiners capturing elevated margins? One theme we are watching is whether Chinese refiners are increasing crude imports to capture elevated refining margins. While on one hand, we think there is some tentative support to this narrative from looking at the publicly available data. In Figure 32, we show that Chinese crude imports have recently recovered from their lows, coinciding with an increase in exports of refined products (Figure 33). However, we think the evidence remains inconclusive with many caveats. First, the data is backward-looking, with the latest observations extending only to end of August, while the recent moves are not out of the ordinary when compared with the historical volatility of these series. Second, our Commodities team notes that crack spreads have already been elevated for an extended period since the start of the war (Figure 34 from CrossCommodity Outlook - Bullish gold and silver; ongoing ME escalation to continue before eventual 4Q26 de-escalation). Refining margins alone therefore appear insufficient to explain why synchronous crude imports and product exports would be rising only now. For the time being, we view this as a developing narrative rather than a confirmed trend, but we think that it remains an important theme to watch. If China were to increase imports to add to inventories, rather than to export products, it would remove one balancing mechanism for energy markets.

Figure 34. All-in oil/product prices are above $120/bbl (dark blue line), similar to 2022; however, the breakdown is different, with refinery margins much higher (light blue) and crude lower (grey) (from Cross-Commodity Outlook - Gold not a long given hawkish Fed

We recently moved gold back to neutral. While we were initially bullish on gold following the US Treasury’s buyback announcement (see our reaction here), we have since shifted the position back to neutral. This comes as resilient economic data, alongside persistently elevated energy prices, has prompted markets to question the duration of the tightening cycle. Reflecting this narrative, government bonds have sold off globally while the USD has strengthened. In such an environment, we think the bullish case for gold is less attractive and we remain on the watch for further catalysts before getting back into the trade. In terms of catalysts, we think the rates component is more important. In Figure 35, we show the performance of gold conditioned on whether the US 2y yield and DXY are above or below their respective 55dMA. We find that gold underperforms when yields rise, irrespective of the momentum in the dollar. Digging deeper and looking at the slope of the Treasury curve in Figure 36, we see similar dynamics emerge, with both bear steepening and flattening regimes usually coinciding with negative performances in gold while bull steepening regimes have provided the most supportive backdrop. With the length of the hiking cycle remaining uncertain, we think the risk-reward remains skewed towards staying neutral gold.

Investor flows in gold ETFs also suggest positioning may need to clean up further before re-entering the trade. In Figure 37 and Figure 38, we show that gold ETF flows across China and the world ex-China have recently followed price action, turning net bullish as gold recovered over the summer. Since then, gold has retraced and remains well below its 200dMA, while positioning is somewhat caught offside and remains net bullish. We therefore think there is room for positioning to clean up further before we re-enter the gold long position. Adding to this, we think physical demand from India is unlikely to provide a strong near-term catalyst when looking ahead and thinking in terms of who the marginal buyer could be. In Metal Matters - Import duties remain a headwind for India gold imports in 2H’26, our colleagues in Commodities expect India’s gold imports to remain below last year’s levels despite the usual September-to-November seasonal recovery, as high import duties, elevated gold prices and increased recycling continue to discourage fresh imports. In Figure 39, courtesy of our Commodities team, we highlight that negative local premiums point to weak immediate demand. Elevated oil prices are also adding pressure to India’s current account which subsequently reduces the potential scope for easing of import duties that could trigger further gold related dollar outflows.

Figure 37. Recent gold ETF flows have followed price action,

Figure 38. There is scope for positioning to clean up further turning net bullish as gold recovered over the summer as net ETF flows remain long

Source: Citi Research, Bloomberg

Source: Citi Research, Bloomberg

Source: Citi Research, Bloomberg

Reiterating $5k year-end target for gold; binary risks at Jackson Hole

We are more bullish medium term. That said, we are not convinced that the central-bank demand story is permanently over. A world of increased geopolitical fragmentation should continue to make reserve diversification a priority for central banks. Given that gold is a primary beneficiary, we are bullish gold over the medium term. Our Commodities colleagues also remain constructive, with a 0-to-3-month target of $4,800/oz and expect a recovery in Indian imports in early 2027 conditioned on oil prices easing that could eventually see import duties being reversed. For now, however, we would need to see positioning clean up further along with more clarity over the length of the G10 hiking cycle before adding back our gold long. It may need a peace deal with Iran, to really help both US rates and gold demand again.

Base Metals – remain long

Remain long base metals despite copper tariff uncertainty. We remain constructive on copper and base metals broadly as we think the structural demand from electrification, power infrastructure and AI/data center buildouts continues to outpace mine supply growth, leaving the market increasingly reliant on scrap to balance demand. Our colleagues in Commodities expect mine supply to be broadly flat in 2026, supporting a medium-term path toward $15,000/t copper. More tactically, we think the cyclical picture remains bullish for base metals. Our backtest in Figure 41 suggests that the information ratio is strong when both Global CECID and CESI are positive. We remain in this regime, both for the US, and globally, though note that the recent strength has been coming more ex US. One caveat here, we think that uncertainty on the potential implementation of Section 232 tariff has been a headwind and led to a set-back in early September. Citi colleagues’ base case remains that no blanket tariff on refined copper is ultimately implemented. But at this stage the premium between LME and Comex has normalized already, suggesting that market expectations have been pared back (as per Figure 42). Even if tariffs do not get implemented this year, we think the broader bull case remains intact and stay long base metals here.

FX – cutting carry risk

Cutting EMFX carry. As discussed in the EM rates section, our volatility signal triggered for EMFX. Given that positioning going into the volatility has been somewhat stretched, we do not want to fade it and therefore neutralize our EMFX overweight. While it is tempting to add a USD long given the new Fed outlook, as the forecasts by our FX strategist colleagues suggest (see Foreign Exchange Forecasts - September 2026), the level is probably not conducive to chasing it here, especially if there should be a risk that there is an Iran deal, which would reverse some of the deteriorating trade balance. We therefore stay on the sidelines.

Source: Citi Research

Illiquid corner - The next leg higher in sugar is coming

We initiate a long position on sugar prices. Sugar prices rallied on the back of lower European supply and lower ATR levels in Brazil. The impact of a strong El Niño is likely to become more evident between November 2026 and January 2027, as the market gains greater visibility into Indian yields, harvest outcomes, and available stock levels. We stay long uranium and allocate half the risk from uranium to sugar.

We remain bullish as strengthening El Niño, and likely increased pull for diversion of sugarcane toward ethanol production will lead to higher prices. Supply risks continue to build across several key producing regions, while India's recent measures to contain domestic sugar prices, including authorizing 1mmt of duty-free raw sugar imports, releasing government stocks, and directing mills to divert additional sucrose toward sugar production, reinforce our view that domestic inventories are considerably tighter than officially reported. Belownormal rainfall across Maharashtra, Karnataka, and Marathwada increases downside risks to 2026/27 production, while sharply lower ethanol diversion highlights the severity of the underlying supply deficit. Beyond India, adverse weather conditions are also raising production risks in Thailand, further reducing global supply flexibility and reinforcing a constructive outlook for sugar prices.

*Size of the bubble represents the previous price performance of each commodity

** Inventory, yield and price changes are estimated for the period between the moment El Niño officially announced start and end date

Source: Citi Research, Expana, Bloomberg

Brazil remains the market's key balancing supplier; however, weather-related operational and harvest execution risks during the remainder of the season leave little margin for error and could constrain export availability in the coming months. Finally, sugar offers a unique combination of upside catalysts: potential supply shortfalls associated with a strong El Niño and additional demand support from elevated global ethanol and fuel prices. As a result, global sugar balances appear increasingly vulnerable to further tightening, leaving prices highly sensitive to any deterioration in Brazilian weather, Indian production prospects, or biofueldriven demand growth.

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Historical Performance of Asset Allocation vs.

Reference Index

YTD, the reference index (as described in our White Paper) has returned 8.03%, whilst our portfolio has returned 7.98%, leaving an excess return of -4bp YTD (end of day September 23th). For the ex-ante tracking error, we target 400bp, but our conservative approach of using perfect correlation across positions results in much smaller ex-ante tracking errors. Our ex-post tracking error ran at 0.72%, calculated as a median of the last 3 months, and our current ex-ante error is running at 0.61%.

Citi Views: Prospects for Returns to Mid-2027

n In Citi’s asset class specialist’s forecasts, TOPIX, MSCI China and MSCI EM are top performers to mid-2027.

n Brent is the underperformer at the end of 2026.

n Forecasts for Commodities, US rates, S&P 500, Global MSCI and US & EUR credit are only to end of 2026.

The Implied Total Returns are expressed here in local currency terms and only achievable by domestic investors 1) Non-USD returns converted using Citi FX forecasts vs. spot; USD hedged returns incorporate FX forward hedging cost; FI returns assume funding at 3m SOFR or equivalent local short rates 2) Only index targets set by Citi strategists, Bloomberg consensus forward dividend yield used to calculate implied total return; MSCI AC World forecast level refers to local index, it is aggregated excluding the US; MSCI EM forecast level refers to USD index; For countries where Citi does not forecast FX, no currency change is assumed (less than 1% of global index); 3) G4 targets shown are for 10yr yields whereas return forecasts are weighted across the curve. EMU yield (spot and forecast) calculated from weighted EGBI constituent country 10yr yields. EM and China Local Debt forecast (unobtainable as a product) derived from weighted EMGBI constituent country 5yr yield forecasts; EM local ex China Total Returns are USD unhedged. 4) Targets are on spreads. Since September 2022, credit returns represent spread returns (and do not incorporate government bond returns). 5) Targets are price forecasts vs. spot. The BCOM forecast is derived from the underlying constituent forecasts shown in the Commodity section below. Note that Citi does not forecast heating oil, gasoil, Kansas wheat, soybean oil, cotton, lean hogs, live cattle and feeder cattle. This corresponds to roughly 20% of the index where returns are assumed to be zero; 6) FX returns are GDP weighted USD returns vs. forwards; 7) SOFR return calculated from quarterly forecast path shown in the G10 rates section below. Note: EM Local doesn’t include Russia. Libor 3m has also been changed in the December 2022 publication to SOFR. NB: Futures trading involves substantial risk of loss.

Source: Citi Research and Bloomberg

Metrics on Reference Index Constituents

Source: Citi Research

FX Hedging Considerations

To help asset allocators think about their FX exposures, we show 1y FX hedging costs from the viewpoint of a USD, EUR, JPY, GBP, CHF, and CNY-based investor, as well as include USD-hedged returns for all assets in the main returns table in

Ranking of Return and Sharpe Ratio Forecasts

Ranking Citi strategists’ total return forecasts (Figure 57), China equities and Japan equities come out on top.

On a Sharpe ratio basis (Figure 59), US TIPS and US Gov Bonds are the

Asset Class Specialists’ Views

Figure 61. Asset Class Specialists' Views

Global

Global Economic Outlook & Strategy: Global Resilience—Sunshine Despite Very

Economics

Cloudy Skies

Global FX

Foreign Exchange Forecasts: September 2026

US

US Rates Weekly: Only hawks outside the window

Europe

European Multi-Asset: 2027 Presidential Elections in France: Why they matter

Rates

Japan Rates Weekly: Yen weakness acceptable at effectively fastest rate hike

Japan pace?

EM

Emerging Markets Strategy Weekly: Rough Waters Ahead

US

US Equity Strategy: Midterm Election Perspective European Equity Strategy Multi-Asset: European Equities and the Natural Gas

Europe

Price Shock: Less Vulnerable This Time?

Equities

Japan

Japan Strategy: Post-MPM equity strategy: Return to growth driven by flattening

EM

Global Equity Strategy: The Fed and the Long End US High-Grade Credit: AI and Credit Markets: The Buildout, The Risks, and How

US IG to Price Them

US HY

The Speculative Grade Beat: Ten Billion Debut: AI’s Record-Setting HY Entrance

Credit

Europe

European Credit Insights: Rates, REITs and Refis

EM

EM Credit Weekly: Navigating asymmetric macro risks Oil Monitor: Uncertain times: Geopolitical disruptions spread to the Saudi bypass

Commodities pipe, to prompt regional dealmaking

Source: Citi Research

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Appendix A-1

ANALYST CERTIFICATION

The research analysts primarily responsible for the preparation and content of this research report are either (i) designated by “AC” in the author block or (ii) listed in bold alongside content which is attributable to that analyst. If multiple AC analysts are designated in the author block, each analyst is certifying with respect to the entire research report other than (a) content attributable to another AC certifying analyst listed in bold alongside the content and (b) views expressed solely with respect to a specific issuer which are attributable to another AC certifying analyst identified in the price charts or rating history tables for that issuer shown below. Each of these analysts certify, with respect to the sections of the report for which they are responsible: (1) that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc. and its affiliates; and (2) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report.

IMPORTANT DISCLOSURES

Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of Brazil,Canada,Colombia,European Union,France,Germany,Hungary,Italy,Mexico,Poland,South

Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from Australia, Commonwealth of (Government),Brazil,Canada,Chile,China,Colombia,Czech Republic,European Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government). Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation

(Government),Brazil,Canada,Chile,China,Colombia,European Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,United Kingdom of Great Britain and Northern Ireland (Government). Citigroup Global Markets Inc. or its affiliates received compensation for products and services other than investment banking services from Australia, Commonwealth of (Government),Brazil,Canada,Chile,China,Colombia,Czech Republic,European Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government),United States in the past 12

Citigroup Global Markets Inc. or its affiliates currently has, or had within the past 12 months, the following as investment banking client(s): Australia, Commonwealth of (Government),Brazil,Canada,Chile,China,Colombia,Czech Republic,European Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government). Citigroup Global Markets Inc. or its affiliates currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: Australia, Commonwealth of

Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government),United States. Citigroup Global Markets Inc. or its affiliates currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: Australia, Commonwealth of

Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government),United States. Citigroup Global Markets Inc. and/or its affiliates has a significant financial interest in relation to Australia, Commonwealth of

Union,France,Germany,Hungary,India,Italy,Japan,Mexico,New Zealand,Norway,Poland,South Korea,Sweden,Switzerland,United Kingdom of Great Britain and Northern Ireland (Government),United States. (For an explanation of the determination of significant financial interest, please refer to the policy for managing conflicts of interest

Analysts’ compensation is determined by Citi Research management and Citigroup’s senior management and is based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates (the “Firm”). Compensation is not linked to specific transactions or recommendations. Like all Firm employees, analysts receive compensation that is impacted by overall Firm profitability which includes investment banking, sales and trading, and principal trading revenues. One factor in equity research analyst compensation is arranging corporate access events between institutional clients and the management teams of covered companies. Typically, company management is more likely to

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Research product ("the Product"), please contact Citi Research, 388 Greenwich Street, 6th Floor, New York, NY, 10013, Attention: Legal/Compliance [E6WYB6412478]. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Pursuant to the Market Abuse Regulation a history of all Citi Research recommendations published during the preceding 12-month period can be accessed via Citi Velocity (https://www.citivelocity.com/cv2) or your standard distribution portal. Historical disclosures (for up to the past three years)

RESEARCH ANALYST AFFILIATIONS / NON-US RESEARCH ANALYST DISCLOSURES

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Citigroup Global Markets Inc.

Dirk Willer; Alice Zheng; Alex Saunders

Citigroup Global Markets Limited

Vinh Vo; Adam Pickett; Giammarco Miani

OTHER DISCLOSURES

Any price(s) of instruments mentioned in recommendations are as of the prior day’s market close on the primary market for the

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The proportion of all Citi Research research recommendations that were the equivalent to "Buy","Hold","Sell" at the end of each quarter over the prior 12 months (with the % of these that had received investment firm services from Citi in the prior 12 months shown in brackets) is as follows; Q2 2026 Buy 33%(63%), Hold 44% (51%), Sell 23% (49%), RV 0.5% (87%): Q1 2026 Buy 33% (63%), Hold 44% (52%), Sell 23% (46%), RV 0.5% (89%); Q4 2025 Buy 33% (63%), Hold 44% (50%), Sell 23% (46%), RV 0.4% (91%); Q3 2025 Buy 33%(61%), Hold 44% (52%), Sell 23% (50%), RV 0.4% (80%). For the purposes of disclosing recommendations other than for equity (whose definitions can be found in the corresponding disclosure sections), "Buy" means a positive directional trade idea; "Sell" means a negative directional trade idea; and "Relative Value" means any trade

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