AFS Markets Blog: Midday 06/07/2026

• Meanwhile in markets, ECB doves are getting the upper hand in the Governing Council. Predictably, punting for no more rate hikes is doing just wonders for European stocks. Record after record is being broken while US stocks have been lingering sideways ever since President Trump struck a deal with the Iranians on halting the war;

• For the hawks on the ECB Governing Council, the writing for another quarter point hike is literally on the wall. When the best thing Bundesbank President Nagel can do is saying that the ECB should keep all optionalities, he’s saying that another hike should not be discarded just yet. Meanwhile, the doves can point to the crash in oil prices since the Iran deal was struck. And confidently say that the ECB is now a “good position” – to quote French central bank head Moulin. Good position as in: we likely won’t have to act again with a hike;

• At pixel time, the ECB dated ESTR for the September meeting has sagged to 2.31. So, about 8bps of hikes are priced in. What a difference a week makes. Last Monday, odds still favored a quarter point hike at the September meeting. In any case, while I am pretty sure that the ESTR rate for the September ECB can sag further (ditto for the July ECB) as a hold is now likely, an even safer bet would be to punt for pricing out odds of a hike further down the road. If the ECB won’t hike in September, there’s little reason for our central bank overlords to consider a move as distant as December. Yes, the war could come back, Hormuz could close again. Or maybe there will be geopolitical black swan. But let’s stick with the known unknowns to avoid making things unnecessarily complex. Do we really believe that when the Republicans inevitably lose control of Congress at the midterms, President Trump will go back to war with Iran? Or return to war before the elections, when he has done literally anything in his power to lower oil and fuels prices? In both cases, the answer must be logical no;

• Furthermore, it’s not that solid growth of the Eurozone economy risks overheating. On the contrary. Eurozone GDP growth is tracking at suboptimal and lousy half a percent annual rate according to the EU Commission’s Economist Sentiment Index (a rival of the ubiquitous PMIs). ECB doves can safely point out that the economy actually needs a bit of love and caring from the central bank;

• Turning to some market commentary, the Stoxx 50 is up marginally, but that’s enough to record an ATH at 6,431.42. Bund yields are down a couple of bps across the curve, but level-wise, we’re not breaking new ground here. The 2y is facing stiff resistance (the 100-DMA) at the current level of 2.5. If markets come to their senses and realize that the ECB is done hiking, we should go lower here. But not that much as punters will optimistically assume that with the Iran shock out of the way, growth must pick up at some point, steepening the ESTR OIS curve further out;

• Keep an eye on OATs ahead of the court ruling tomorrow on National Rally leader Marine Le Pen’s political fate . At 79bps, the 10y Bloomberg generic Bund spread is close to its widest level in months. If Le Pen remains barred for at least until the Presidential elections, her protégé Jordan Bardella will run instead. And while the 30-year Bardella is still somewhat of an unknown quality, economically speaking he’s more likely to the right of his mentor. That’s positive for OATs. If Bardella runs but falls through as lightweight, the (center) right stands to benefit. I am sure markets will like one of the more conventional conservative faces running for Presidents. Regardless, punters also remain laser-focused on the 2027 budget as passing the austerity-lite 2026 budget proved to be an epic task. A Bloomberg article this morning warned that if there’s no budget, the deficit, which should be close to five percent of GDP this year, will blow out to more than six percent. And mind you: next year it should fall below five percent of GDP;

• Elsewhere, Brent crude prices are singing the familiar refrain that is barely holding on to the $70s a barrel handle. In FX, the broad dollar is up modestly, which has helped push USDJPY back into the 162 handle. US equity futures aren’t showing much of a pulse following the Independence Holiday weekend;

• Looking ahead, eyes will be on a handful of major central bank speakers this afternoon. We also get the ISM services PMI, which at an expected 54.1 should point to relatively solid US economic growth.

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