AFS Markets Blog: Morning 16/07/2026

• Meanwhile in markets, the good outweighs the bad. The US launched another wave of airstrikes on Iran overnight. And even struck an Iran-linked tanker deep within the Gulf. But that’s all offset by the good: President Trump confirmed that Tehran has released an American detainee as a goodwill gesture;

• As I explained in yesterday’s comment, I believe the intensifying US strikes and the renewed naval blockade won’t change Tehran’s position one Iota. Yes, they will likely succeed in getting the Iranians back to the table – the detainee release is a case in point – thereby allowing Trump to claim a tactical victory. Peace through strength and all that. But are the Iranians really willing to give up Hormuz? Or cede more on the nuclear issue than with President Obama’s deal? If there’s going to be a new deal before the US midterms (and likely sooner), it will closely resemble the one that is now on life support;

• Turning to some market commentary, Brent crude oil futures prices are off the highs, with the most actively traded contract softening to $84.5 a pop, down a dollar or so from yesterday’s close. US Treasury yields are trading just a smidgen above yesterday’s lows, when softer than expected PPI data resulted in another leg down in yields across the curve;

• Asian equities are mostly lower: Nikkei down 2.8%, Chinese onshore stocks down, offshore up, the Kospi suffering a ‘normal, everyday’ loss of more than five percent. S&P 500 futures are flattish. Despite ASML’s blowout earnings and outlook yesterday, tech darlings like SK Hynix and Samsung are suffering stiff losses of eight and six percent, respectively. The narrative in FX in recent weeks is that the Greenback has utterly failed to benefit from the flare-up in violence in the Persian Gulf. Today is no difference to that pattern;

• Fed rate hike pricing has eased in the wake of Fed Chairman Warsh’s second day of testimony before Congress. The forward curve is peaking at 4.01, down from a high of 4.19 percent before Warsh spoke. Of course, softer than expected CPI and PPI figures are in the driving seat this week when it comes to the US short end. But also take into account that Warsh turned out to be less of a hawk, especially during the second day of his testimony. He specifically disputed that the AI boom is inflationary, reasoning that while it might drive up prices in the near term, at the same time it will boost the supply side of the economy. Remember that our central bank overlords have started to mark the AI boom down as inflationary. And thus, an excuse to raise rates;

• And speaking of the Fed, President Trump has started to interfere with monetary policy – the man can’t help himself. Speaking to Fox Business, Trump said that it’s better for the Fed to hold rates than to raise them. Of course, Trump did say that he’d rather have cuts;

• With the US-Iran MoU having broken down and thus boosting energy prices, ECB-speakers – who had become so utterly dovish at the start of the month – are dropping the dovish charade like a cheap date. You will hear ECB-speakers confidently claim that their current non-committal stance offers them max optionality. Our central bank overlords’ hands aren’t tied to any outcome for the next several interest rate decisions. Don’t believe them. Max optionality is a euphemism for “we have no clue.” When oil prices, and, to a lesser extent, natural gas prices fell in the wake of the June 17 Islamabad Memorandum of Understanding between the US and Iran, one ECB-speaker after another fell in line and guided for no more hikes. Fast forward several weeks and instead we hear the soft drumbeat pre-announcing a likely hike. Clearly, the ECB is a victim of circumstances: geopolitical circumstances completely beyond its control. Effectively, monetary policy has been outsourced to a very mercurial US President and the Mullahs in Tehran;

• Practically speaking, a July hike should be priced out. By pointing out that there are no imminent second round effects (price increases begetting further price increases, and wage increases in particular), ECB-speakers have bought themselves time to await the next twists and turns in the Iranian saga. September is live for a hike (I have one penciled in). But since I believe the war to be over before the US midterms, the ECB will remain on hold for the rest of the year. Very much contrary to ESTR swaps that price in a third hike further down the road;

• Looking ahead, the calendar is pretty much empty, with only obligatory US jobless claims and a few Fed-speakers to look forward to.

‍