AFS Markets Blog: Morning 02/09/2026

• Meanwhile in markets, we’re back to square one. US-Iran tit-for-tat strikes have pushed up oil prices, which in turn have dragged bond yields higher while weighing on equities at the same time;

• According to the US officials cited by the US news publication Axios, the US military launched air strikes against around a hundred targets overnight, including a port city (where there are reports of civilian casualties) and Iranian tankers. US air strikes against Iranian shipping is particularly notable. Axios quoted US officials as saying that any Iranian strikes against tankers crossing the Strait of Hormuz will be met with retaliatory strikes in the new ‘tanker for tanker policy’;

• Predictably, Iran retaliated with reports of drone or missile strikes in Gulf nations as well as in Jordan, where a US base was the target of a missile strike. At the same time, the war of words is also heating up. According to Al Jazeera, in first response to the flare up of violence Iran’s Supreme Leader Khamenei junior warned that he has an “unforgettable lesson” in store for the Americans. President Trump sounded off in a similar vein, posting in a Truth Social that he “couldn’t care less if they sign a worthless, to them, agreement.” And with “their economy totally collapsing. They are just playing out the inevitable.” The real kicker was the final sentence, when he kind of desperately asked himself when the Iranian people are going to rise up and fight (and do Trump’s dirty work for him);

• If past precedent is any guide, the tit-for-tat strike will likely simply stop at some point. Not because of a deal – far from it. This is the no peace, no war uncertainty that plenty of folks have complained about. That begs the question: will air strikes end soon? No clue. Perhaps it will get worse before it gets better. Regardless, I won’t read much in Trump’s threats. This is the guy who threatened to wipe out Iran (“a civilization will die tonight”) last spring and then quite frankly chickened out;

• Turning to overnight market commentary, Brent crude future prices are off the highs, trading at $95.5 a barrel. Which compares to an overnight high of $96.5 a barrel. Dutch natural gas futures follow a similar pattern. US Treasury yields, which were up notably yesterday, are loitering near yesterday’s highs. The 30y at 5.27 is back at pre-intervention levels – Treasury Secretary Bessent’s jawboning attempt last month;

• USDJPY is going places, with the world’s most-watched cross tanking from 160.4 to 159.5 this morning. The move down follows hawkish Bank of Japan speak. Governor Ueda hinted at a rate hike this month while the hawkish Board Member Takata, who dissented in favor of a hike in July, signaled further rate hikes down the road;

• In sharp contrast stands ECB-speak – the hawks hitting the wires and sounding… quite dovish. I take due note of Bundesbank President Nagel refusing to punt for further hikes after the inevitable 25bps hike this month. His hawkish colleague from the Irish central bank, Governor Makhlouf, also refused to speculate on moves beyond September;

• And speaking of the ECB, markets expect our central bank overlords to run a remarkably tight ship – no inflation to help out debt-trapped governments. Take the 5y5y inflation-linked swap rate, which is at a benign 2.16 percent and thus fully consistent with price stability. The ESTR rate five years ahead is at 3.20 percent. Which makes for interesting arithmetic. Econometric models put the Eurozone real neutral rate of interest at about zero percent, or two percent in nominal terms. Subtract two percent from the ESTR forward five years ahead and we arrive at a future real rate of 1.2 percent. Way above any econometric estimate for the Euro Area neutral real rate;

• One interpretation for the seemingly elevated long-term ESTR forward rate is that the market expects the central bank to keep fiscal policymakers on their toes by leaning against the wind. With tight(ish) monetary policy. In any case, with markets punting for a long-term ECB rate of three and a quarter percent, fiscal debt-to-GDP ratios will only stabilize when governments run primary surpluses. That’s based on the assumption that long term nominal Euro Area growth is about three and a quarter percent, which happens to be roughly equal to the long term ESTR rate;

• Elsewhere, Asian equities are down, with losses of around a percent for Chinese markets and almost three percent for the Nikkei – the stronger yen is knee-capping Japanese equities. The tech-heavy Korean Kospi is down more than three percent. Which for that ever so volatile index, is basically nothing;

• Keep an eye on EURCHF, which at 0.94 is near its highest level in more than a year. We now expect the ECB to raise rates again in December while we don’t expect the Swiss National Bank to follow in the ECB’s footsteps at its next three Board Meetings. The SNB will stay on hold for a while longer, and that’s weighing on CHF;

• Looking ahead, we have the Bank of Canada meeting this afternoon (should be a hold) and the Fed’s Beige Book tonight. Key events later this week include a speech by Fed Governor Waller tomorrow and then payrolls on Friday. Ahead of those events, 18bps of hikes are priced in for the FOMC meeting this month.

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