AFS Markets Blog: Morning 03/07/2026

• Meanwhile in markets, high-flying AI stocks entering correction territory this summer hasn’t fazed punters one bit. As a matter of fact, old school sectors of the economy rallying have pushed broad indices higher still. Perhaps punters reason that in the loss-making race to the bottom for the dominant Large Language Model, ‘normal’ companies stand to benefit from the AI productivity gains;

• Stuff like the Korean Kospi and single stock names like Sandisk, SK Hynix, and Micron are all deep into correction territory, with peak to last price losses exceeding ten percent, and sometimes close to twenty percent. At the same time, European stocks are doing just great, with the Stoxx 50 rising to an ATH. Even the S&P 500 isn’t doing too bad, trading just below the ATH. The Nikkei is in a league of its own with a YTD gain of forty percent while Emerging Market stocks sit on a YTD gain of twenty percent;

• Over in Europe, sectors that have outperformed over the past month are banks, aerospace/defense, consumer staples, and insurance. Basic resources stocks are one of the worst performers for obvious reasons (the Iran deal, Hormuz reopening). Tech is down too, of course;

• In bond space yesterday’s softer than expected US labor market data, including the worrisome plunge in the labor force participation rate, has given US Treasuries a little bit of reprieve. Yields are off the pre-payrolls data highs, but not much. Be aware that US markets are closed today for the Independence Day weekend;

• Bunds are outperforming this week on the back of ECB-speakers getting second thoughts about a second quarter point hike. That includes the hawks, who have suggested that a hold is now a valid option too. President Lagarde herself was on the wires overnight and forced to defend the June hike. With oil prices deflating and barely holding on to the $70 handle this week, the June hike is starting to look old hat;

• Fed rate hike pricing has remained static this week in the sense that OIS and futures are locked in at two quarter point hikes in the next nine months. The big move took place in the August fed funds and SOFR futures, where a hike has been mostly priced out. The August fed funds futures price in only 5bps of hikes for the July FOMC, down from a post-Warsh peak of no less than seventeen percent;

• In FX the broad dollar is down several tenths of a percent for the week on the back of softish US labor market data. Japanese officials will have breathed the proverbial sigh of relief that there was no blowout data, which would likely have triggered a blowout rally in USDJPY, with the yen reaching new record-lows versus king dollar;

• And speaking of FX, Japan’s Finance Minister Katayama repeated the intervention warnings this morning. To give credence to her remarks, she added that Japanese officials are in close contact with their American counterparts;

• With the Independence Day holiday approaching, overnight news worthy of our attention is sparse. Bloomberg ran a story that there will be no let up in the Trump administration’s campaign to put its proxies on the Board of Governors. Former Chairman Powell and Governor Cook are still in the crosshairs so to say. At the same time, in remarks made in an interview with CNBC yesterday, President Trump admitted that Chairman Warsh could be boxed in by a FOMC that is highly reluctant to cut rates as per the White House’s wishes. Trump’s money quote on Warsh: “he’s a great guy and a great pro, and I know where he’d like to be, but he has to do what he has to do.” Meaning that if the ever-mercurial Trump sticks to his words, he will leave Warsh alone for a few months;

• The news flow in the Iran conflict has slowed to a trickle. The latest stories are actually about pageantry, namely the ceremony that is the funeral of Supreme Leader Khameini, which will run from today through July 9. Traffic through the Strait of Hormuz, while off the lows, is still a fraction of pre-war levels. But for markets the Hormuz chapter is closed;

• Looking ahead, with US markets closed, today’s calendar is predictably uneventful. And with the summer holiday lull upon us, next week’s calendar is rather light. Key events include Tuesday’s court ruling on French Presidential hopeful Marine Le Pen’s ban on running for office. The data docket is void of tier one releases and the smattering of central bank speakers is predictably smaller than it was this week.

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