I don't think your overreacting hormones do some crazy things lol. But atleast she isn't taking his whole name! And it is a honor that she looks up to her brother so much that she wants to give her baby a part of his name, my guess is that you have yourself a pretty awesome guy who will be a great Daddy first and a great uncle after that!!!!! :)
I think you should name your baby what you feel proud of despite anyone else's opinions or actions. :)
I can completely see why you are upset. But know that, eventually, her little boy will go by his own first name and nickname, and most people wont even know his middle name.
It's the hormones that are making you upset, it'll pass through your memory in no time- and it won't even bother you after both kids are here. It's cute his sister wants to have your brothers name as his middle name :) And I also agree with the above comment, nobody calls anyone by their first and middle name. For all you know, everyone might be just calling your boy junior, which is very special :)