• Meanwhile in markets, in the Iran conflict we have escalated from love pats on the back of the head to quite aggressive slapping. But don’t call it a return to war – at least not yet. The US is still on the sidelines, with President Trump imploring restraint from both sides in hopes of salvaging a deal with Iran;

• Brent crude futures, which traded as low as a benign $93 a barrel on Friday, have soared to nearly $98 a pop following tit-for-tat strikes – I call it choreographed escalation – between Iran and Israel – note that the US wasn’t involved;

• The latest round of strikes between Iran and Israel apparently started with the latter striking Beirut, targeting Hezbollah. Iran responded with missile strikes against Israel. Now, according to the latest on the wires, Israel is preparing for an air strike campaign against Iran lasting several days, complete with large-scale reserves mobilization;

• Believe it or not, but President Trump appears to have been a voice of moderation during the escalation. He spoke by telephone to the nowadays well-known war journalist from Axios, Barak Ravid, telling him that he would call Israel’s Prime Minister Netanyahu and ordering him not to retaliate. Trump also said that he’s very close to a deal with Iran. Of course, the usual caveats of Trump espousing a breakthrough apply;

• To add insult to injury, the Houthis just announced a blockade of the Red Sea for Israeli vessels. Plus, the grouping launched some missiles against Israel to boot;

• While Trump has apparently taken up the mantle of peacemaker, don’t count out the US military. On Saturday, the US struck Iranian coastal radar sites. Plus, US forces shot down several Iranian drones;

• It’s not all bad news in the Iran conflict according to a favorite X account of ours. The account (@BabakVahdad) tweeted that a Pakistani official told Al Arabya News that Washington and Tehran are fast approaching an interim agreement. We’re at the decisive stage in peace talks that will either produce a deal, or a complete collapse in talks;

• Turning to some market commentary, equities are making eye-popping moves, and that has little to do with Iran. For punters, the recent deflation of the AI trade is front and center. SK Hynix, the poster boy of the most recent AI equity surge, has added to its recent losses this morning and is now down more than twenty percent from the late June peak. The Korean Kospi index is down a fat 16 percent during the same time period. Nvidia has shed twelve percent from its peak while the Nasdaq is down by about six percent;

• US Treasury yields are higher on the back of the Iran escalation. The 2y at 4.19 has broken out to the upside as OIS (fed funds) now price in two quarter point hikes in the next twelve months. Be aware that over the weekend President Trump called on new Fed Chairman Warsh not to raise interest rates. Remarks that probably had the opposite of the intended effect on markets and Warsh. The 30y is back above the key 5.00 handle while the 10y is homing in at the May peak of 4.66;

• The broad dollar has failed to benefit from the Middle East escalation. In the crosses, the yen is limping in, with USDJPY staying above the key 160 handle. Through all the Middle East war mess, the Chinese yuan has appreciated markedly. On a trade-weighted basis, the yuan has risen to an 18-month high. In the fixing versus the dollar the currency is at its strongest level since early 2023;

• Looking ahead, the calendar today is void of anything of even only minor importance. The highlights this week are Wednesday’s US CPI, Thursday’s ECB meeting (25bps hike expected by markets and consensus), and Friday’s expected Ipo of SpaceX. I am particularly attentive to the start of the World Cup on Thursday. Given that the US allowed the Iranian team in, and with Trump likely not wanting to ruin the championship with a return to war, definitely keep an eye on the Iran headlines this week for signs of smoke.

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