Is it War or Peace?

The S&P 500 gave back some of its recent gains., reversing some of Tuesday’s hopeful price action. This reversal comes on the heels of Russia pouring cold water on headlines of constructive ceasefire talks.

But in a repeat of the past few days, there was yet another systematic driven squeeze higher into the bell; otherwise, I think we could be trading closer to SPX 4550

Whether the market ignores macro risks or simply gets comfortable with them, the risk premia have aggressively been priced out across US equity markets. The VIX sub 20 likely keeps the systematic crowd in the game despite an estimated $80bn in pension fund rebalancing, which probably started kicking in overnight.

OIL

Oil is finding support amid the headline confusion about Putin’s wartime regime. The Kremlin reported no breakthrough in peace talks, while Ukraine says Russia is deploying reinforcements, dashing hopes for an end to the war.

OPEC has taken markets by surprise several times at its monthly meetings, but the base case, for now, is that the status quo will be maintained. There had been hopes that OPEC+ would help alleviate near-term pressure with a more rapid easing of production cuts, but the signals suggest no deviation from the plan in recent months to add 400kb/d at each meeting. Still, I think traders might be uncomfortable chasing oil higher ahead of OPEC.

That said, traders have a vital backstop. The market remains tight as Russian oil purchases via self sanction continue to drop despite the absence of new official government sanctions.

GOLD

Gold ETFs have taken advantage of the pullback in prices, increasing their holdings by more than 5 million ounces in March, suggests that more traditional gold buyers ( not just speculative tourists ) are entering the space, supporting the argument that gold will not only offer an excellent wartime hedge but protection against the knock-on inflation and even the potential for a Fed policy error.

FOREX

EURUSD is higher through the EU yields channel

There was a massive beat on Germany’s CPI, up 2.5%mom in March; the consensus was at 1.6%mom. Year-ended is now at 7.3%, a multi-decade high.

Spanish CPI rose even more, up 3%mom, with consensus at 1.3%mom. While the preliminary prints for March do not include subcomponent details, the surprise suggests underlying inflation in Germany this year is likely to be even stronger than expected, especially if Russian gas deliveries are heavily interrupted or even permanently stopped signalling a call to all ECB inflation fighters.

The hefty inflation signal greater scope for Eurozone CGB rates to sell off more quickly and possibly keep 2 -year EU yields above parity

Last week below 1.10, I suggested investors should look for strategies to buy, not sell, the EUR based on US yield curve inversion expectations as the US Bond market is being far too kind to the FED

That view is further cemented as German 2-year government bond yields turned positive for the first time since 2014. More than 90% of the German government bond market is now back to offering positive yield. And with the US 2s10s yield curve inverted for the first time since 2019 provides one of the most vital signals yet that the US economy is moving into a late-cycle environment the US dollar could struggle.

From Stephen Innes, Managing Partner at SPI Asset Management