AFS Markets Blog: Morning 18/09/2026

• Meanwhile in markets, who’s the king of the bond market: Fed Chairman Warsh or President Trump. Trump of course!

• Long end US Treasury yields are down for the week, with the 10y 3bps lower and 30y shedding 7bps. In the wake of the hawkish FOMC meeting, where Chairman Warsh teed up a string of rate hikes, the 10y and 30y clocked multi-decade highs of 5.04 and 5.40 percent respectively. 2y yields are still up for the week, though we’re off the highs. Notably, the 2y10y spread at a lousy 25bps gives Warsh & Co scope for a couple more rate hikes before the curve inverts. And restart incessant recession talk;

• Brent crude futures prices at $103.5 a barrel are down about a percent for the week. More importantly, crude is down sharply from this week’s high of $109.8 a barrel. At the same time, Dutch natgas futures are two percent lower for the week at 77.83 euros per MWh. And this is where bonds take their cue from: lower energy futures prices. In turn, futures prices are lower simply because President Trump teased a possible deal with Iran, which I think weighs even more on prices than Saudi Arabia announcing it will restore the damaged East-West crude pipeline partially within days;

• Last eve Trump told the now well-renown Axios journalist (Axios, of course) Barak Ravid that he’s at a major crossroads with Iran. I’ll let the man speak for himself here: "I have a big decision coming up. Do I want to go in and annihilate them [the Iranian regime] or do I not? It's a big decision. Anything could happen with me." Translated: somebody stop me…;

• Trump is expected to hear out leaders of the Gulf Cooperation Council at the UN General Assembly meeting next week about that fork in the road: give diplomacy another try or launch another air strike campaign. Or even worse: contemplate boots on the ground. Trump’s likely calculus is to avoid a renewed military confrontation that would surely spike energy prices and annoy voters frustrated with high prices at the pump even more. In this regard, it’s worth pointing out that polls suggest that the Republicans will not just lose the House, but possibly also their Senate majority. That would make Trump the proverbial lame duck. The Iranians aren’t stupid and they know very well about Trump’s midterm electoral predicament. For a deal – a return to the Memorandum of Understanding – Tehran will almost surely extract a pound of flesh. If Trump thinks he can get a good deal by simply lifting the blockade, I have this bridge for sale;

• Trump might also realize that he has nothing to lose. If he loses his Congressional majority, why not go all in now and throw everything he has (left) at Iran? Bottom line: that’s just one reading of the tea leaves. If I had to bet, my money would be on an October surprise. Surprise meaning that we can’t really predict what will happen;

• Resuming with some market commentary, USDJPY is up more than a point at 157.15 following the disappointing Bank of Japan meeting. In a split 7-2 decision, the BOJ raised rates by 25bps to 1.25%. While we can make much of the dovish dissent, markets aren’t really fazed yet. BOJ-dated TONARs still almost fully price in another quarter point hike in December. I think what punters – and probably US Treasury Secretary Bessent too – simply find lacking, is lack of hawkish overtures that would have propped up the yen. But with Japanese Government Bond long end yields mostly motionless, I think the BOJ will think job well done;

• For the record, USDJPY is now close to erasing half its interventions-induced declines. The broad dollar is up strongly this week, gaining about a percent on a trade-weighted basis. Equities haven’t done that much, with the S&P 500 and Stoxx 50 flattish for the week. S&P 500 futures do point to a higher open. So, who knows;

• While the BOJ refused to entertain hawkishness this morning, the ECB is the complete opposite. Vice President Vujcic hit the wires this morning, saying in an interview with Reuters that ESTR OIS pricing is worth maintaining “for the time being.” With markets pricing a terminal deposit rate of 3.25% and with some odds of 3.50%, I think we’ve gotten ahead of ourselves. But that’s just my Pavlovian response to the aggressive hawkish repricing of ESTRs;

• Keep an eye on OATs after French Finance Minister Lecornu made yet another promise to bring the deficit down. Spending controls (not cuts!) should engineer a deficit of 5.0% of GDP in 2027. France tried to bring the headline deficit down to that level this year too. But we’re now headed towards 5.4% of GDP according to the Minister;

• Romanian euro and dollar bonds could get some reprieve after the country’s President nominated yet another Prime Minister in an attempt to break the political impasse in the deadlocked parliament;

• Looking ahead, with today’s calendar containing only second-tier events, focus will turn to next week’s UNGA and (hopefully) a barrage of market-moving geopolitical headlines. Germany will hold state elections again over the weekend, this time in Mecklenburg-Vorpommern and the city state of Berlin. In Berlin the AfD is expected to gain a foothold but not win outright. The party should win in Mecklenburg-Vorpommern though fall well short of a majority. Another strong showing by the AfD and underperformance by the CDU might end up toppling Chancellor Merz;

• Other key events next week include Chinese President Xi Jinping’s visit to the US on Thursday. We also have key economic data (PMIs on Wednesday) and the usual smattering of major central bank speakers.

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