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On April 26, according to the Wall Street Journal, in order to simplify the negotiations on reciprocal tariffs, US negotiating officials plan to use a new framework developed by the Office of the United States Trade Representative (USTR), which lists major categories of negotiations, such as tariffs and quotas, non-tariff trade barriers, digital trade, product origin principles, economic security and other commercial issues. In these categories, US officials will put forward specific requirements for individual countries, but people familiar with the matter emphasized that this document may also be adjusted at any time. People familiar with the matter said that the United States initial plan is to negotiate with 18 major trading partners in turn over the next two months. The initial plan is to alternately participate in the talks with six countries per week for three weeks (six countries in the first week, another six countries in the second week, and another six countries in the third week) until the deadline of July 8. If US President Trump does not extend the 90-day suspension period he set by then, those countries that cannot reach an agreement will begin to face reciprocal tariffs.On April 26, after the United States announced additional tariffs on goods from many countries, Peruvian business people expressed concerns that the US governments extreme measures would disrupt the global trade order and may even trigger a global economic recession. Alvaro Barrenechea Chavez, vice president of the Peruvian-Chinese Chamber of Commerce, said that the negative impact of the US tariff policy has begun to emerge and hoped that the US government would rethink. Recognizing the importance of countries working together to promote development, I think this is the best way to become a true "world citizen."Market news: Musks xAI company plans to raise about US$20 billion in a financing round.Conflict situation: 1. Ukrainian top commander: Russia tried to use air strikes as a cover to increase ground attacks, but was repelled by Ukraine. 2. Ukrainian Air Force: Russia launched more than 103 drones in the night attack on Ukraine. 3. Local officials said Ukraine launched an attack in the Belgorod region of Russia, killing two people. 4. The local governor said that Russia launched an attack on the Dnipropetrovsk region of Ukraine, killing one person and injuring eight people. Peace talks: 1. Trump: ① The situation between Russia and Ukraine is gradually becoming clear, and they are "very close" to reaching an agreement. ② Ukraine is unlikely to join NATO. ③ Ukraine has not yet signed the rare earth agreement and hopes that the agreement can be signed immediately. ④ It is foreseeable that the United States will conduct commercial cooperation with Ukraine and Russia after reaching an agreement. 2. Russian Foreign Minister: Russia is "ready to reach an agreement on Ukraine." 3. Russian Presidential Assistant Ushakov: Russia and the United States will continue to maintain active dialogue. 4. Russian Presidential Assistant: Putin discussed the possibility of resuming direct negotiations between Russia and Ukraine with the US envoy. 5. The differences between the United States, Europe and Ukraine are clear. The documents show that European countries and Ukraine have raised objections to some of the US proposals to end the Russia-Ukraine conflict. 6. Market news: As part of the peace agreement, the United States asked Russian President Putin to abandon the demilitarization requirement. Other situations: 1. President of Hungarys OTP Bank: We hope to return to all business areas in Russia after the (Russia-Ukraine) conflict ends. 2. Ukrainian President Zelensky: US ground forces are not necessary for Ukraine. 3. Trump said Crimea will remain in Russia, Zelensky: Never recognize it. Agreeing with Trumps view, Crimea cannot be recovered by force. 4. NATO Secretary-General Rutte met with Trump and senior US officials to discuss defense spending, NATO summit, and the Ukrainian conflict.Rising global trade risks, overall policy uncertainty and the sustainability of U.S. debt top the list of potential risks to the U.S. financial system, according to the Federal Reserves latest financial stability report released on Friday. This is the first time the Fed has conducted a semi-annual survey on financial risks since Trump returned to the White House. 73% of respondents said that global trade risks are their biggest concern, more than double the proportion reported in November. Half of the respondents believe that overall policy uncertainty is the most worrying issue, an increase from the same period last year. The survey also found that issues related to recent market turmoil have received more attention, with 27% of respondents worried about the functioning of the U.S. Treasury market, up from 17% last fall. Foreign withdrawals from U.S. assets and the value of the dollar have also risen on the list of concerns.

Analysis of Oil, the Japanese Yen, and the Australian Dollar – Nowadays, It's Getting Easier to Locate Air Pockets

Drake Hampton

Apr 06, 2022 10:06

Fundamental Analysis of Markets

Tuesday, US equities plummeted, with the S&P 500 losing 1.3 percent. US 10-year rates increased 15 basis points to 2.55 percent after Fed Governor Brainard cited Paul Volcker on runaway inflation and urged the Fed to rapidly reduce its balance sheet (more below). 2yr yields increased 9bps, reintroducing marginally positive territory to 2s10s. Germany's 10-year bunds increased 11 basis points to 0.61 percent. Oil is down 1.7%.


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Equities fell sharply as incoming Fed Vice Chairman Lael Brainard made more hawkish-than-expected comments about the rate of balance sheet reduction, driving the UST 10-year yield higher.

 

Nothing is conclusive, but the Federal Reserve appears to be on track for an aggressive rate hike path in the near term. Thus, with the aggressive Fed once again biting at stock market investors' heels, US stocks plummeted overnight.

 

Despite the tape's risk-off move, financials remain a relative outperformer (on a margin). The big increase in the US 10y +16bp and the steepening in the 2s10s overshadow the tape's stagflation concerns-tilt.

 

Meanwhile, the market may have expected Fed Governor Brainard to deliver more balanced remarks — instead, they received statements on the hawkish side from someone like Brainard. She was not excessively hawkish, but she also did not give anything on which the doves could hold.

 

Liquidity remains scarce, and no one appears willing to take the other side as air pockets become more accessible. 

Fundamental Analysis of Oil

According to reports, the EU intends to propose a phase-down of mandatory coal imports from Russia, with details still being worked out. Additionally, the EU is anticipated to bar the majority of Russian trucks and ships from entering the bloc.

 

Oil is slightly down as the market views the proposed penalties against Russia as being limited to coal, while leaders remain divided on how to handle Russian crude. US National Security Advisor Jake Sullivan, however, has stated that Washington will announce additional sanctions on Russia this week, including additional oil sanctions.

 

The United States' appeal for a coordinated SPR release last week fell on deaf ears, with no OECD countries adopting the idea thus far. Although the Japanese Industry Minister stated that the details of the IEA-led reserve release are still being worked out, oil prices have remained relatively stable.

Forex

Central banks are still attempting to strike a balance between combating inflationary supply shocks on the one hand and not worsening growth or demand shocks on the other. Europe appears to be having the most difficulties balancing the two, which means Thursday's ECB minutes will be closely watched. They come ahead of the current FOMC minutes, which are scheduled to be released later today. On that call, and in light of Vice-Chair Leal Brainard's remarks yesterday as a plate warmer, we should anticipate hawkish FOMC minutes focused on accelerating the run-off of the balance sheet.

Fundamental Analysis of the Australian Dollar 

The Australian rates market underperformed on a less dovish RBA. Economists now anticipate a May or June rate hike by the RBA. Nonetheless, traders can shrug their shoulders, as the AUD has been one of the best performing G10 currencies over the last month, owing to strengthening terms of trade and more aggressive RBA pricing, with a cash rate of roughly 3.25 percent priced by end-2023.

 

The rates markets, on the other hand, are suddenly second guessing themselves, and for good cause. A 3.25 percent cash rate would increase the mortgage repayment share of income for a new borrower to an equal record high of 35% (70 percent pre-tax) and cause a housing market correction, so throwing the economy into recession and prompting an RBA "stop out" policy.

 

Fortunately for bulls of the AUD, the rate hike channel is only one component of the long AUD trade. Nonetheless, terms of trade are a big driver and should support the AUD on falls, even more so now that China is attempting to shift its policy lever in favor of commodities.

Fundamental Analysis of the Japanese Yen

USD/JPY sold off overnight from 122.80/90 to a low of 122.375 before establishing a foundation and bouncing. While official comments may evoke a kneejerk reaction on the spot, the risk of the BoJ changing policy or intervening directly in FX markets is low.

 

USD/JPY should remain supported on dips as both US rates and energy prices continue to rise.