AFS Markets Blog: Morning 10/09/2026

• Meanwhile in markets, the three-dimensional Bessent trade – short crude oil, long the yen, long the 30y UST – is starting to look a wee bit stretched;

• Earlier in the week US Treasury Secretary Bessent dared punters to bet against the house (read: him), boasting that he holds superior information about events and policy compared to us mere mortals. Problem is that Bessent has no crystal ball. And he certainly cannot control his boss, President Trump;

• Brent crude oil futures prices have reached the all-important symbolic $100 handle. Even with the US midterm elections approaching, which will likely cost the GOP its majority in the House, Trump is not backing off from his pressure campaign on Tehran. With predictable results. At the same time, the Ukrainians have taken a leaf out of Tehran’s playbook with its relentless attacks on Russian energy infrastructure. Resulting in the tightest diesel markets in years, if not decades (Russia was a major exporter of diesel before Kiev took at the refineries). And, lo and behold, according to overnight wire reports US diesel stocks are at their lowest level since the early 2000s right before peak demand season starts;

• It’s a familiar trope that energy prices are the tail that wags the dog. Rising energy prices – and rising commodity prices in general – are dragging bond yields higher. Which is exactly what’s been happening. The 10y hit 4.85 overnight, the highest level since the 2023 central bank rate hike panic. The 30y has outperformed – no new highs yet – but Bessent’s jawboning-induced decline in the 30y yield has been fully erased;

• Furthermore, one wonders how much control Bessent has over the Bank of Japan. Yes, the BOJ will in all likelihood hike this month. But then what? Will it be enough, especially if markets start adding to rate hike bets that are perhaps too much to stomach for Japanese officials? Remember that the BOJ sits on a pile of low yielding government bonds while it will end up paying more and more interest on the banking system’s reserve balances. What Tokyo might gain with arresting the rise in long end yields could be offset by BOJ operating losses. There is no free lunch here, Mr. Bessent;

• Elsewhere, rate hike pricing for the September FOMC has edged up ever so slightly. Ahead of today’s US PPI and tomorrow's all-important CPI, 16bps of hikes are priced in. A bp or so more since the start of the week;

• And speaking of central banks, today’s ECB meeting I could almost describe as a non-event. A 25bps well-telegraphed and fully priced in rate hike, no forward guidance but obvious hawkish inclinations, slightly higher inflation forecasts on the back of higher natural gas prices, and tweaking GDP forecasts slightly higher as the Eurozone economy has proven resilient. The European job carousel, not monetary policy, will dominate the presser though. Perhaps President Lagarde will drop a clue on her exit (likely in December) or even her succession. Operationally speaking, I am keeping an eye on hints of an increase in Minimum Reserve Requirements. In my money market spread forecast, an MRR increase by December is my baseline;

• Asian equity markets are lower this morning, with losses in the 0.5%-1.5% range. S&P 500 futures are off the lows. In FX USDJPY is at 153.5, thus hovering near its recent low of 153. Brent crude futures prices are still at the $100 handle while Dutch natural gas futures have slid below the 80 euros per MWh handle. Regardless, crude is up more than five percent for the week while gas is up a phat ten percent;

• Keep an eye on Eurozone Bund spreads. The OAT-Bund spread touched a post-Eurozone crisis high of 90bps this morning. Punters fret about next year’s Presidential election as well as another budget fight – next year’s budget deficit is likely to stay above an unsustainable five percent of GDP;

• OAT spread widening is also weighing on BTPs. At 85bps, lo spread is at a six-month high. Italy will hold general elections next year, though we may have to wait until the end of the year before the Italians actually head to the polls. In any case, so far Spain and Portugal, where budgets are relatively solid, have been spared from the Bund spread widening;

• Looking ahead, besides the ECB we will be eying US jobless claims and PPI, an appetizer for tomorrow’s CPI that might end up determining the outcome of the September FOMC.

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