AFS Markets Blog: Midday 15/07/2026
• Meanwhile in markets, we’re yet at another crossroads in the Iran war. With Tehran having reasserted its control over the Strait of Hormuz – the International Maritime Organization said this morning that crossing the Strait is too dangerous (perhaps except for a few daring Greek shipping magnates) – President Trump has raised the stakes again. Similar to his threats last spring, he has warned Tehran that he will literally bomb them into submission. I know, we’ve all seen this movie before;
• There’s plenty of chest-thumping on the US side. Axios (Axios, of course) reported that Trump was briefed on a large-scale air strike campaign against Iran. Afterward, Trump, in a rerun of his outbursts from last spring, threatened to strike Iran’s civilian infrastructure. Trump made similar threats on March 30… and incidentally, Brent crude futures prices peaked exactly a day later. Markets are showing a similar reflex this morning, with crude oil futures grinding higher and hugging yesterday’s highs of around $87 a barrel;
• So, Trump’s rather desperate play is to bomb Tehran into submission. Bombing campaigns haven’t worked before in the conflict (otherwise Tehran wouldn’t have shut down Hormuz again). And they didn’t accomplish anything strategically when the US faced a similar situation as far back as December 1972, when President Nixon ordered a large-scale bombing campaign that was intended to force North Vietnam back to the negotiating table in Paris;
• Nixon’s bombing ‘worked’ in the sense that North Vietnam did return to the negotiating table in Paris and signed the deal. Nixon thus presented the bombing as a textbook case of ‘peace through strength.’ The bombing also helped alleviate South Vietnam’s concerns that that the deal with the North was basically a sellout (which it was). Uncle Sam would always stand ready to bomb the North into submission;
• The tragedy of the December 1972 bombing campaign was that the deal was essentially identical to the one that National Secretary Advisor Kissinger had agreed with the North in background negotiations that concluded in the autumn. But on which the US backtracked because of (well-founded) South Vietnam concerns. The biggest – and fatal – concession that the US made was to allow the North to keep more than a hundred thousand troops in the South. Kissinger would later cynically quip that "we bombed the North Vietnamese into accepting our concessions;"
• You probably see where this is going. The Memorandum of Understanding isn’t dead. It’s just hibernating. Trump can bomb and blockade all he wants. But he won’t get a better deal. After all the damage the US has inflicted on Iran, are a few more bombs really going to change Tehran’s calculus?; Hormuz is lost now, but not forever. No one wants to be held hostage by a few Iranian drones, missiles and speedboats. Everybody who is reliant now on the Strait will adapt. But it will all take time;
• Regarding markets, I am sure oil prices and bond yields will spike if a desperate Trump moves on from the choreographed tit-for-tat strikes and pulls the trigger and orders an intense bombing campaign. But that would exactly be the moment to start looking at the stuff that has been clobbered by the breakdown of the ceasefire. Like the Stoxx Travel and Leisure index, which has fallen more than four percent over the past week. But also, the German short end, which incorporates over-priced ECB rates. I see one more quarter point hike (in September) but no more, assuming that the war will be over in the autumn and (long) before the US midterms;
• The long end of the Bund and UST curves have been hit hardest by the resumption of fighting. In the case of the USTs, perhaps real yields are too high now as breakevens and inflation-linked swap rates have completely failed to keep pace with nominal yield increases. Either the inflation market is underestimating inflation, or the bond market is over-estimating it;
• Looking ahead, punters will have to make do with day two of Fed Chairman Warsh’s uninspiring testimony. Compared to his first press conference, there was nothing new except for his slight inclination to raise rates at some point. But clearly not this month as the unusually soft June CPI doesn’t require a nimble Fed. Other events include the US PPI release, the Bank of Canada rate decision (a hold according to consensus) and the Fed’s Beige Book.
