• Meanwhile in markets, over the course of about 48 hours we went from close to an Iran peace deal and an open Strait of Hormuz back to a Mexican standoff and a closed Strait. Remarkably, markets are largely unperturbed even after a US navy destroyer literally shot a hole in the hull of an Iran merchant ship to enforce the blockade;

• If I had to guess, markets are taking their cue from reports on Al Jazeera (and probably elsewhere too) that the Iranians will travel to Islamabad tomorrow for a second round of peace talks. Earlier, the Iranians – who, it must be emphasized, clearly don’t speak in one voice – threatened to stay home unless the US lifts its blockade. With the US blockade quite effective, it seems that the Iranians lost their nerve. That, or Tehran will send negotiators simply out of courtesy towards the Pakistani government;

• About the disarray in Iran’s top leadership, it was the Iranian President who tweeted last Friday that the Strait was fully open before the Revolutionary Guards intervened, saying that it remains closed for shipping. Note that according to reports at least one commercial vessel managed to get through during the reopening honeymoon that was cut short by the hawkish IRGC;

• Readers of my commentaries will probably know that I’ve been quite the optimist in this conflict all along (short war, gradual but slow return to normal). Call it erring on the side optimism if you will. Given the rising tensions over the weekend, I think we’re in a similar situation as we were before the truce announcement two weeks ago. Back then, President Trump raised the stakes by giving a veiled threat of thermonuclear war. This time, the President is making similar though non-nuclear threats against the Iranians. Thus, raising the stakes ahead of talks in Islamabad tomorrow;

• There’s another completely bearish take on the situation. And that is that Trump is taking the Iranians on a ride (and the market too I should add). The reasoning is that Trump is sending his cronies (Kushner and Witkoff) to talks are no more than a ploy, and that Trump persists with demands that the Iranians could never accept (i.e. unconditional surrender). The President’s ultimate aim is to select Iran’s new leadership, control Iranian oil and the Strait. By any means necessary;

• So, my bottom line for now is that tomorrow the truce will likely be extended – I think Trump is done with war – of the conventional variety at least. Economic warfare will continue, and we’ll see how long markets can take the strain of uncertainty;

• Turning to some overnight market commentary, markets are relatively calm, with Brent crude futures rising to $95 a barrel, up from Friday’s low of $86, thus staying below the $100 level. US Treasury yields have erased roughly half of Friday’s decline while S&P 500 futures have erased half of Friday’s rally. Asian equities are up this morning, with gains approaching one percent. But that’s only because Asia couldn’t join in on the relief rally on Friday;

• The broad dollar is up, but the gains have only managed to erase Friday’s losses. In the greater scheme of things, the dollar has erased the war-induced gains;

• ESTR swaps should price out the final couple of bps in hikes for the April meeting following more relatively dovish ECB-speak over the weekend. Our central bank overlords are pretty much in unison that the meeting next week will be a hold, given that natgas prices and market-based measures of inflation compensation have stabilized;

• In other news, the war is proving to be quite the financial strain for the Gulf countries. According to the WSJ, the Emirates have queried the US about getting a USD swap line from the Federal Reserve;

• Elsewhere, keep an eye on Belgian debt after Moody’s cut the nation’s credit rating to A1 from Aa3 last Friday. For some time, we’ve been saying that Belgium should trade wider than France. Belgium’s debt predicaments are just as bad as those of France. On the other hand, France is systemic and sovereign, which Belgium isn’t;

• Looking ahead, eyes will be on Iran – that goes without saying with the truce expiring tomorrow. The calendar for the week isn’t very exciting. Our key calendar event is the April PMIs on Thursday, which should give us insight into businesses’ pricing behavior with regards to the war.

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