Markets
US equities were weaker Wednesday, S&P down 1.2%. US10yr yields fell back 9bps to 2.29%. Oil up 5.1% after Russia indicated it had temporarily limited capacity on a significant pipeline after storm damage.As traders digested higher yields and higher inflation signals via the oil price channel, stocks were lower. We may see volatility increase further regarding multiple 50bp hikes and even emergency rate hikes in the near term.Pressure points were building again with oil back on the boil, resulting in stagflation weighing on sentiment again. Reports were circulating that the US was restoring 64% of the product exclusions from former President Donald Trump's China duties. The exclusions will run from October 2021 until December 2022.This looked to be net China positive here as this would exclude tariffs on certain goods. USD/CNH was unchanged on the headlines, as the New York session was winding down.
On the US restoring some Chinese product exemptions, I think this could have some interesting implications on a two-fold basis:
- It would appear the US extending an olive branch to China to put some further pressure on Russia to de-escalate conflict with Ukraine
- This could likely reduce some inflationary pressures on the US consumer because tariffs were a tax at the end of the day, and the US consumer was bearing the brunt through higher prices.
Gold
Gold seemed to be catching the attention of market tourists as there was a burst of sudden demand, and it felt as if something was cooking. Bullion weathered the FED storm and based well and hasn't had any severe downside reaction to Powell's "Whatever it will take" moment. Strategically, gold had been mirroring moves in Brent oIl, and rightly so. The Russian supply disruption and possible EU sanctions on Russian oil could send Brent above recent highs +130 and moonshot inflation expectations favorable for bullion.
Forex
EUR/USD had been quiet since Fed Chair Jay Powell's hawkish comments on Monday night. The market focused on the possibility of 50bp hikes at some point and was now pricing nearly another eight hikes for 2022. US rates sold off, and the USD rallied. Even though sentiment had been constructive of late, the stalled Russia/Ukraine talks weren't helping the single currency. But we may see the higher oil, lower EUR/USD correlation set in again.The pound could feel the heat from rising oil prices. There were reportedly 30,000 UK corporates that source energy via contracts with Gazprom UK (MCX:GAZP). If these hedges were not honored with Gazprom Energy, it would likely cost them a fortune if they had to go to market at current prices to replace those hedges. Indeed, that could keep the cable bulls awake at night.
Oil
It was a massive week for oil markets, with meetings of EU leaders and a NATO summit both happening over the next few days. A new wave of Russian sanctions was likely, and speculation in the press focused on the probability of sanctions affecting oil.The US and UK had already imposed bans on Russian oil, and many EU member states supported a ban. Still, a few key players (notably Germany and Hungary) opposed, and a decision must be unanimous.There was also speculation about the possibility of a new Iran deal, with the US reportedly ready to remove the "foreign terrorist organization" designation for Iran's Revolutionary Guards Corps. Iran's ~1.3mb/d of production upside would hit the oil price under normal circumstances but represented only a fraction of what might be lost from Russia.Meanwhile, the big elephant in the room was the US President, who is to join the NATO meeting and EU Summit in Europe to pressure Germany. Sanctions and the Russian oil embargo were the topics. While anti-Putin public sentiment was running deep in Germany, policymakers were stuck between a rock and a hard place trying to balance public opinion vs the chance of an economic implosion by turning off the Russian oil supplies.