AFS Markets Blog: Midday 22/07/2026

• Meanwhile in markets, bonds are feeling the heat from the rally in crude oil and natural gas futures prices, which are rising on the back of diminishing hopes of a truce in the US-Iran war. And our ECB overlords, who will dine tonight ahead of tomorrow’s interest rate decision, will be particularly worried about the relentless rise in gas prices;

• I clock Dutch natural gas futures prices at nearly $62 per MWh. When we conveniently ignore the single day spike to $69 on March 19, futures prices are basically at the highest level since the war started. Brent crude futures are approaching the $95 handle, the highest level in a month and a half. Interestingly, gold is doing what is supposed to be doing when geopolitical worries dominate the market’s narrative: rising. With the benefit of hindsight, gold looks like it has bottomed out at around $3,940. Prices have rebounded to $4,116, an increase of four percent compared to the late June lows;

• According to wire reports, the US intensified its airstrikes overnight across Iran. For those who keep tabs on the US punishing Iran for attacking the merchantmen in the Strait of Oman (the casus belli), US airstrikes have taken place for eleven straight days. Meanwhile, the Iranians continue to retaliate by striking US and non-American targets in the Gulf countries, but also Jordan. According to reports, Gulf countries are frustrated by the flare-up in violence and are still trying to mediate a truce, but to no avail;

• We’re particularly attentive to speculation that the US could launch a ‘limited’ ground invasion in weeks. On both OSINT social media accounts and on outlets like Al Jazeera, US airstrikes on infrastructure in the strategic port city of Bandar Abbas are seen as a possible attempt to soften the grounds for the proverbial boots on the ground. While we’re agnostic (posh for saying having no clue) about the likelihood of a ground offensive, we do take note of Iranian media speculating about the same thing: US troops landing. According to Bloomberg, state media quoted Iran’s Army Commander-in-Chief as saying that the Americans “will face millions of people who will confront them with everything they have.”

• While Bund and UST yields are only up a bp or so for the day, it’s the levels that matter. Across the Bund and UST curves, yields are either at or just below the highest levels since the outbreak of war. Interestingly, OATs are not underperforming bonds despite pessimistic remarks made by French Premier Lecornu this morning that the lost cause that is the budget deficit. According to Lecornu, the deficit likely won’t be lowered below the 5% target this year. Lecornu blamed the war for the fiscal slippage (of course he did). In any case, while markets probably knew that the French deficit target for 2026 was too optimistic, the problem is the 2027 budget. How is the government going to lower the deficit in an election year?

• Elsewhere in markets, the dollar has started to gain a bit of ground on the back of the Iran worries. Still, we’re not seeing strong moves except in USDJPY, which broke through the 163 handle overnight. The sharp move higher in USDJPY overnight triggered verbal intervention and leaks to the press by Japanese officials. The most telling which was a report on Bloomie that the Bank of Japan is considering speeding up the pace of rate increase from the current leisurely six-month or so intervals. BOJ-dated TONARs greeted the news by rising by 4-7bps for each of the next six meetings except the upcoming meeting, which is flat;

• Keep an eye on EURCHF, which at 0.9269 is near its highest level since the outbreak of war. CHF is weakening because of the different paths the ECB and Swiss National Bank have taken this year. Tomorrow, the ECB will gently prime the market for another hike in September. We think that the SNB, on the other hand, will stand pat for the next twelve months;

• Fed rate hike pricing is up on the back of higher energy prices. But with still only 40bps in hikes priced in for this year, markets remain relatively lukewarm on the prospect of Fed tightening under Chairman Warsh. Warsh has managed to eek out some credibility with bond market punters as Treasury breakevens have barely moved up despite the war returning and the rally in energy prices. We’re not so lucky as euro breakevens have moved up by about 30bps this months (that’s for the five-year tenor);

• Equities in Europe are climbing the proverbial wall of worry, with gains ranging from 0.2% for the Stoxx 60% to 0.7% for the CAC. S&P 500 futures have edged lower though, down 0.4% from the overnight high;

• Looking ahead, the calendar for today is quite frankly empty. Focus will be on more Iran headlines, tomorrow’s ECB meet (a hold with somewhat hawkish tilt, but no tee-up of a September hike), as well as Friday’s preliminary PMI data for July.

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