AFS Markets Blog: Midday 08/07/2026

• Meanwhile in markets, President Trump, who was in a “good mood” as recent as Sunday according to Canadian Prime Minister Carney, decided to stick the knife in the Iran deal, sending oil prices and bond yields soaring while equities are sliding;

• Trump, in his signature ranting style when speaking to the press at the NATO summit in Ankara this morning, said “for me, I think it’s over,” referring to the Iran deal. He called Iran’s leadership “scum” and “cuckoo” and a waste of time, though adding that he won’t stop his negotiators continuing (indirect) talks with Tehran. As always, the man is literally all over the place;

• The casus belli for Trump appears to be the Iranian attack on a Qatari LNG carrier on Tuesday. The LNG carrier transited the Strait along the Omani coast instead of the mine-infested central part of the Strait or the route that Iran demands, namely along the Iranian coast. The US has been actively shepherding ships along the Omani coast literally in the dark (with transponders turned off) though apparently without outright naval escorts. Regardless, Tehran’s motives are perfectly clear: they fear losing control over Strait transit, its biggest source of leverage in the conflict with the US. Tehran wanted to send a message. Even if that message involved hitting a ship owned by Qatar, which had helped mediate the deal in the first place;

• The US retaliated with an “offensive” strike on 80 Iranian targets – the word offensive is important in this regard as prior violations of the cease fire were presented as defensive strikes. Regardless, the Iranians responded in kind, boasting this morning that they’ve targeted 85 US military facilities in the Gulf region;

• Trump pulling plug on the month’s old deal is particularly painful for bonds. Bund yields are up 5-9bps across a bear-flattening curve. Bund yields are clearly much closer to the Iran war highs than the pre-war lows. The terrible situation for bonds is even more glaring when we consider the level of crude oil futures prices. Yes, crude is up strongly this morning. Rising ten percent from levels before the US strikes took place, and before the US revoked Iran’s license to sell crude to a hair below $79 a barrel. However, futures now encounter resistance at the 200-DMA around these prices. More importantly, prices are still way below the spring peak of $126.41 a barrel;

• So, what happens next? Do we return to full-blown war, or stay in the grey area of measured, choreographed, or symbolic tit-for-tat strikes? Interestingly, the Iranians are saying that the US has violated the deal. Dovish when we compare it to Trump’s outburst that the deal is over (though he didn’t fully kill it). Readers of my comments might have noticed that I have consistently erred on the side of optimism with regards to the US-Iran conflict. My axioms have been – and still are – that Trump isn’t the man to wage a real and lasting war, and that he still wants to prevent a rout of the GOP at the midterm elections. The best way to make sure that the Republicans stand a chance, is to prevent a spike in fuel prices or a broader flare-up in inflation. So, Trump’s bluster has limits. And the endurance of the Iranians isn’t infinite either even though they’re fighting on their home turf. The economy has collapsed and essential imports – perhaps I am speculating here – are in short supply. Bottom line: I don’t expect a return to war, but that’s just my two cents as an armchair geopolitical expert;

• Perhaps mediators are already doing their best to mend the situation – we just don’t know. What we do know is that deal was always fragile, given what has transpired in the past four months. But fragility doesn’t mean it’s completely broken or cannot be repaired;

• Elsewhere in markets, European equities are suffering stiff losses, with the Stoxx 50 down more than two percent. S&P 500 futures are down 0.7%. Interestingly, the broad dollar’s gains on the back of renewed fighting are quite meagre. The broad dollar is up only a tenth of a percent or so for the day. Gold prices – the much-vaunted geopolitical hedge – are taking the plunge, trading more than two percent lower at $4,045 per Troy ounce;

• ESTR swaps have repriced hawkishly almost with the blink of an eye. A September quarter point ECB rate hike is now basically fully pried in. At the beginning of the week, a hike was mostly priced out. August fed funds futures point to a (somewhat) live FOMC meeting later this month, with about 8bps of hikes priced in;

• Looking ahead, Iran headline watching is back with a vengeance. Besides, we have a bit of ECB-speak and the release of the FOMC minutes of Fed Chairman Warsh’s first interest rate decision.

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