This morning, another rise in oil prices was likely to fuel inflation fears, and rate hike jitters around the meaningful Fed action required to snuff those fears out.
Unquestionably, we are to get QT sooner rather than later and a much higher fed funds rate. That will be the macro backdrop that the stock market must now face on its own.
If the numerous late-cycle indicators that have been flashing red actualize, protracted Ukraine war notwithstanding, it could be a challenging environment for investors to navigate as economic growth concerns could eventually overshadow inflation risks from now on.
Oil
With no light at the end of the tunnel to the Ukraine conflict, oil opened higher this morning.
Oil prices were higher, with global supply shortages outweighing concerns about slower demand in China.
And with no end in sight to the Ukraine war and more international trading houses looking to self sanction Urals oil in May, with many more direct expiring contracts with Russian entities likely not to get rolled over, supply deficits will widen.
Importantly, it will not be easy to envision these companies restarting purchases under any conditions.
And while China's RRR will unlikely provide an immediate boost to demand amid zero COVID policy, the optimistic read-through was that once these restrictions end sooner rather than later, the government will push spending hard. It could be akin to throwing jet fuel on the commodity rally.
The longer the war drags out, the more focus will be on banking and environmental policies that have deepened the current capital deficit facing US oil producers. With little access to equity and bond markets to fund new wellhead projects, the backfill options for the absence of Russian crude become narrower and narrower.
Gold
Gold directly benefits from the Russia-Ukraine conflict inflation effects, which are now more meaningful than direct military developments in a market sense. These consequences have fabricated a hyperinflationary environment that sees gold investors stocking up on paper and physical for the eventual procession to recession.
Asia demand would be driven by the wealth preservation trade on China stimulus (RRR + more to come), while property, equity and credit markets all have headwinds to face.
And the Indian rupee's weakness through oil imports suggested gold could be a viable hedge.
Forex
USD/JPY
USD/JPY was predictably higher through the higher oil channel as Tokyo should run bid into the Fix on the higher implied US yield's higher oil price channel.
EUR/USD
I would expect to see more EU economic downgrades this week on the protracted Ukraine war outlook. Putting money on the euro without a strong EU growth impulse is like treading water in a whirlpool
I speculate that most FX investors currently see around a 10-20% probability of Le Pen winning on Apr. 24. Most of my French colleagues seem to believe that the risk is underestimated.
There is a small premium in EUR and Italian assets, but there is limited hedging for the eventuality. Indeed, this means that should Macron lose, it would be a shock and significant risk event, an event on par with Brexit as it could drive Frexit fears.
The hardest hit would be Italy, as any further European integration projects, recovery funds, and ECB bond purchase backstops would become complicated.