AFS Markets Blog: Midday 09/07/2026

• Meanwhile in markets, equities are still in flesh wound territory following the breakdown of the US-Iran ceasefire, trading not much below their recent highs. Bonds are really hurting even though oil prices have come off the highs;

• Following the latest round of overnight tit-for-tat strikes, it has become quiet – enjoy it while it lasts. With the Iranians having retaliated last, the onus is on the US to strike again. The number to watch will be the number of targets the US military claims to have struck. In the first round of choreographed strikes, the military mentioned 80 targets. Next, Iran said it retaliated by striking 85 US military targets in Bahrain and Kuwait. The US response was strikes at a claimed 90 targets in Iran. Clearly, it doesn’t take a genius to figure out the escalatory ladder. Let’s hope the Americans and Iranians stick to the pattern here and allow us punters to deduce where the latest bound of violence is headed: heating up, stable, or cooling down;

• With Brent crude futures trading at the $77 handle, punters are taking the flare-up of violence in strides. Yes, futures prices are up 10% from the truce low of $70.14, which incidentally was bang in line with the pre-war level. But more importantly, prices are a third below the spring highs, when punters feared the worst. The comparatively modest increase in crude futures prices could embolden President Trump to strike Iran harder. Reading the tealeaves from price moves in the spring, the President does have a pain threshold for crude oil prices. But we’re from those levels, which clearly lie north of $100 a barrel;

• It remains the case that European natural gas futures prices show a far less benign pattern than crude oil futures prices. Futures prices are 50% higher than the pre-war level and only 22% below their March peak. Still, the rise in energy prices in the Eurozone this year, while painful, is a far cry from the 2021-2022 energy crisis hell. From the perspective of the ECB’s inflation target, average crude futures prices in the month of were up 37% from pre-war levels. Natural gas futures prices are up 63% and electricity prices 36%. That compares with increase in 2021-2022 of 53%, 106%, and 94%, respectively. According to Bank of Italy research, the 2021-2022 energy shock boosted core inflation by 1.3 percentage points. If I use the same elasticities, the increase is 0.3ppt, pushing core inflation this year to 2.6 percent. And that’s in a high pass-through scenario with a strong economy (which we currently absolutely do not have);

• A simple Taylor rule suggests that the ECB should raise rates one more time by 25bps. Which, logically, would happen in September. However, I am still not sure that the ECB will actually pull the trigger. Economic growth is weak while the labor market is softening further – right under the ECB’s nose even if they claim it’s still “resilient” (slowly eroding would be a more apt description). Perhaps markets should price in 50-50 odds of a September move. The risk is that Trump makes another U-turn. A dovish one at that;

• Around noon, Eurozone equities are up moderately, with the Stoxx 50 gaining more than half a percent. US equity futures are also higher. Bund and UST yields are off Wednesday’s highs. But on the charts the picture isn’t pretty. Yields are too close to the war highs;

• Looking ahead, we have a bit of Fed-speak and obligatory US jobless claims on tap. Boring, which means we have to make do with more Iran headline watching.

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