AFS Markets Blog: Midday 07/09/2026

• Meanwhile in markets, the only thing that is moving with some vigor today is the yen. Oil and gas futures prices have given much of their earlier gains, which were the result of tit-for-tat strikes by the US and Iran on tankers in the Strait of Hormuz;

• USDJPY fell to a six-month low of 154.1 earlier in the session with nary a word of jawboning by Japanese officials. Against EUR the yen rose to a 10-month high. Bank of Japan rate hike pricing is static, with a hike this month fully priced in, as is another high by the end of the year;

• As is the case with the ECB and Federal Reserve, the market is pressuring the Bank of Japan to raise rates. While the BOJ’s newfound hawkishness has clearly benefited the yen, the effects on Japanese Government Bonds has been less pronounced. Yes, 30y and 40 yields are down a good 20bps from their highs. But the uptrend in yields has not been broken and yields are up substantially over the past twelve months (30y up 133bps, 10y up 74bps). At the same time, Japan’s debt and deficit situation did not improve – it only got worse because of the aforementioned interest rate increases;

• Elsewhere, Dutch natural gas future prices at 73.94 euros per MWh are up percent for the day though below the war-high that we reached earlier in the session at 75.2 euro per MWh. Brent crude futures prices at $96.7 are up modestly compared to Friday’s close;

• According to wire reports the tanker tit-for-tat strikes involved three ships being hit on each side. While Hormuz traffic is very likely still a trickle – there’s a thick fog of war obscuring transits – the good news is that neither Washington nor Tehran wants to return to war. Air, drone, and – nowadays – tanker strikes follow a familiar pacing and are self-limiting in nature;

• Bund yields are up a bp or so and thereby shrugging off the sweeping electoral victory of the upstart far right AfD in the Sachsen-Anhalt state elections yesterday. True, the AfD did not manage to get an absolute majority. Thus, the path forward is unclear. Fortunately, we can safely discard the least likely outcome. Which is that all other parties ally in order to keep the AfD out of government. Won’t happen as it would have the 100% predictable effect of making the party even stronger. Other outcomes would be the end of the firewall that has prevented coalitions with the AfD: a party willing to join it and form a majority government. Other outcomes are new elections or a minority (AfD) government. Which could happen if enough members of the state parliament abstained from a confidence vote in a new government;

• European equities are marginally lower and are unlikely to do much today as we have no guidance from big brother, the US equity market. In the more esoteric corners of the market – the Eurozone money market in this case, our own backyard – Euribor 3-month are perplexingly high this month. The past five settlements have averaged 21bps over 3-month OIS. Puzzling when one considers that 6-month settlements have fallen relative to OIS. Furthermore, I see nothing out of the ordinary in FX swaps or the cross-currency basis. The former still allows for arbitraging by banks: borrowing USD, swapping to euros, and depositing at the ECB. The latter is in line with recent ranges. LTRO/MRO uptake isn’t shifting higher either. And regardless, 3-month borrowings that underpin Euribor have no regulatory value unless borrowed from a corporate or a government treasury (who don’t go beyond one-week tenors anyway);

• Looking ahead, the calendar for today is empty, as is tomorrow’s calendar. The fun starts on Thursday with the ECB meeting and then US CPI on Friday. The ECB meeting will involve a well-telegraphed hike but no surprises as President Lagarde won’t offer forward guidance. US CPI is a different kettle of fish and it could be a real spectacle, unlike the ECB meeting. With 15bps hike priced in for the September FOMC, a hot(er) reading could seal the deal on a hike.

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