AFS Markets Blog: Morning 21/07/2026

• Meanwhile in markets, bond yields and crude oil prices are off the highs on the back of reports that the US and Iran are weighing a ten-day ceasefire. Equities, which never really sold off on the resumption of war, are also regaining their footing;

• According to reports on Axios (your daily source for Iran war insights), the White House and Tehran are weighing the ceasefire proposal that was clobbered together by regional mediators including Egypt, Pakistan, and Qatar. Interestingly, the proposal not only includes a temporary truce, but also a reopening of both the eastern and western lanes of the Strait of Hormuz. Remember that the 60-day ceasefire that was part of the Memorandum of Understanding broke down after the Iranians started to attack ships that the US was shepherding through the west lane along the Omani coast;

• The Axios reports warns us that President Trump finds himself at a fork in the road. He’s moved more military assets to the region for the contingency of a broader airstrike campaign against Iran. He can thus double down on what can best be described as punitive attacks on Iranian (military) infrastructure). That, or giving diplomacy another shot;

• On the Iran side, my interest is perked by one of our go-to X accounts for insights on Tehran’s calculation. @BababkVahdad points out that there’s a split view in the top leadership. The ‘doves’ (for lack of a better) word, such as Foreign Minister Araghchi, believe that military means should serve diplomacy. Revolutionary Guard hardlines think the opposite: that diplomacy serves war aims: giving the US a bloody nose in hopes of deterring more adventurism;

• My thinking on the situation, which was echoed by the Axios report, is that both sides are escalating in hopes of gaining more leverage for returning to the original Memorandum of Understanding. The risk being that things could get very much worse before they get better. Pay special attention to the cassus belli of the recent flare-up in violence. The US is punishing Iran for attacking merchantmen in the Strait of Hormuz. Ships that the US navy helped to shepherd through the Strait along the Omani coast. And now avenging the deaths of US servicemen killed by Iranian air strikes. For the US the war, which is already as deeply unpopular as the Vietnam war was after several years, is now without any strategic aims except for cleaning up the mess that Trump himself has created. In this regard, if the Iranians do accept safe passage for ships along the Western/Omani route, the US will have at least achieved something with the punitive air strikes campaign;

• And on the Iran side, Tehran cannot continue this war and suffer the US blockade indefinitely either. The economy of the country is now truly in tatters, months after a major uprising that was, in part, triggered by the terrible state of the economy;

• Turning to some market commentary, Brent crude has stayed below the $90 handle, trading at around $88 at the time of writing. Mind you that oil has failed to rise on the Houthi's annoucement that they will blockade Saudi Arabia in the Red Sea. US Treasury yields have edged marginally lower in the Asian session. In the greater scheme of things, yields have managed to stay below the May highs as punters can reasonably believe that there’s a fair chance of peace after all. In equity space, S&P 500 futures have roundtripped, rebounding off the lows and now slightly exceeding Friday’s close. Over in Asia, Japanese and Chinese equities are higher while the Korean Kospi is up more than three percent;

• In our neck of the woods, ECB rate hike pricing has eased a wee bit. The ECB-dated ESTR for the September Governing Council meeting has sagged to 2.41, a couple of bps lower than Friday’s close and thus suggesting that a quarter point hike at that meeting is no longer fully priced in;

• In FX space the greenback has gained a half a cent or so versus the Canadian dollar after the White House announced fifty percent tariffs on key Canadian goods, including goods that fall under the scope of the trade deal spanning the US, Canada and Mexico. However, USDCAD rebounding to 1.407 means that we’re hardly breaking new ground here: USDCAD just had touched a one-month low yesterday. In the greater scheme of things, since the war Iran war resumed the dollar has quite simply failed to appreciate;

• Looking ahead, the calendar is empty except for the ECB’s quarterly Bank Lending Survey, which only hardcore ECB watchers (including yours truly) bother to analyze. The next key event is Friday’s PMI data dump. Thus, we’re left with not much to go on except more Iran headline watching.

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