AFS Markets Blog: Morning 09/07/2026

• Meanwhile in markets, while the ceasefire with Iran is now the proverbial dead parrot, don’t call it war. At least that is what President Trump explicitly didn’t do when he pre-announced a new round of air strikes yesterday. He doesn’t want to call it a return to war;

• According to reports, the US struck targets near half a dozen cities overnight. The US dubbed the strikes retaliation for Iran’s attack on commercial shipping in the Strait earlier in the week. Interestingly, the US military specifically mentioned that 90 targets were hit. That’s up from 80 targets in the first round of US strikes, which invoked the Iranians to claim that they would hit 85 targets. Well, the Iranians did retaliate the usual way, sending drones and missiles at US bases in Kuwait and Bahrain;

• The ever so well informed Axios journalist who has given us all the ‘scoops’ on the war, Barak Ravid, tweeted this morning that the current US retaliatory campaign could last several days or several weeks. All depending on the Iranians folding or not. That would be folding on the casus belli (not allowed to say that by Trump): control over the Strait of Hormuz. Recall that I posited earlier in the week that the Iranians felt losing their iron grip on the Strait, forcing them to attack an LNG carrier to make a point to the Americans;

• So far, markets are seeing the end of the truce as controlled escalation with calculated risks, not a return on the uncertainties of war where strikes aren’t choreographed, tit-for-tat, or are not retaliation for a move made by the opposing side. Brent crude futures are remarkably well-behaved, trading at the $78 handle. At that price, futures face stiff resistance at the 200-DMA. US Treasury yields are off the highs in the Asian session by several basis points. In the greater scheme of things, UST yields are trading relatively close to their war highs;

• Asian equities are resilient in the sense that we don’t see stiff losses this morning. Chinese and Korean stocks are moderately lower while the Nikkei is actually up more than a percent. US equity futures have drifted higher while the broad dollar is down marginally;

• ESTR swaps are nudging the ECB to pull off another rate hike, with a September quarter point hike fully priced in. For the July ECB about 5bps of hikes are priced in. Which, of course, won’t be realized;

• Yesterday eve’s FOMC minutes were hawkish as expected, with a few officials already ready to pull the plug at the June FOMC and raise rates. USD OIS rates have drifted higher, with the high point of the forward curve up several bps at 4.11.  The July FOMC remains live, though certainly not spectacularly so. August fed funds futures have priced in 7bps of hikes;

• Looking ahead, the calendar isn’t that exciting with a few Fed-speakers on tap and the release of the ever so stale (and actually useless) ECB minutes of the June meeting. Of course, we also get obligatory US jobless claims. Which should confirm a steady US labor market that could actually be improving in the margins.

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