NATO's $100Bn Boost to Ukraine

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In this publication:

• Fed presidents contradicting on rate cuts

• Chinese yuan keeps going down

• Oil breaches $90 amid Iran retaliation fears

• Equity markets unfazed by economic data

• Stoltenberg's plan to take control of Ramstein Group and fund Ukraine

Let’s dissect

Markets Snapshot

Bond Markets

• US: Atlanta Federal Reserve President Raphael Bostic foresees a only one rate cut in 2024, occurring in the fourth quarter, citing uneven progress in inflation. The US trade deficit widened to USD 68.9 billion in February, marking the third consecutive month of expansion and the largest gap in nearly a year. This trend suggests a potential drag on GDP growth for the first quarter.

• Meanwhile, Fed's Patrick Harker, President of the Federal Reserve Bank of Philadelphia, emphasized that inflation remains high despite a resilient economy and robust job growth, while Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, warned that the central bank might not cut rates at all this year if progress on inflation stalls. These remarks come in a series of speeches by Fed officials, including Fed's Thomas Barkin and Loretta Mester, following Chair Jerome Powell's statement that the Fed would adopt a cautious approach to rate reductions, awaiting more definitive signs of inflation cooling.

• Traders are now predicting a roughly 60% probability of the Fed reducing the Fed funds rate by at least 25 basis points in June. Last week, personal consumption expenditures inflation figures aligned with the Fed's desired trajectory.

• The last week's treasury market movements and the varied statements from Fed Presidents can be summarized in Mohamed El-Erian's latest commentary shared on LinkedIn:

• EU: Eurostat's March 2024 data showed a decline in annual consumer price inflation to 2.4%, falling below the anticipated 2.6% and reaching a four-month low. The market now predicts four ECB rate cuts by the end of 2024, with the first expected in June. Despite the EUR's recovery, market predictions suggest that the ECB will implement more rate cuts than the Fed within this year.

• China: The yuan depreciated to its lowest level against the USD in four months, nearing the lower boundary of the trading range established by the central bank. This decline mirrors anticipations for a softer yuan to bolster economic expansion, aligning with a broader trend in Asia where currencies are weakening against a strong dollar, as the Federal Reserve continues its cautious policy approach.

Commodity Markets 

• Oil: Brent crude stayed above $90 a barrel amid mounting tensions in the Middle East, sparking a significant reassessment of geopolitical risks. With Israel ramping up preparations for a potential Iranian retaliation after striking Syria's diplomatic compound, fears of a wider regional conflict are on the rise. This has also led to heightened activity in the oil options market, driving up volatility and causing bullish calls to trade at a premium to bearish puts. Overall, oil prices have surged over 20% this year, bolstering a market shaped by supply constraints and growing demand.

• In the final week of March, Russia experienced a significant surge in its seaborne crude exports, marking the highest level achieved thus far in the year, despite the first-quarter average remaining close to the commited OPEC+ level. Russia previously pledged to slash its crude exports by 300,000 barrels per day (Bpd) in Q1 2024 from May-June 2023 averages, part of the OPEC+ strategy to stabilize oil prices and avoid oversupply. According to Bloomberg, the gross value of crude exports during the week ending March 31 reached a five-month peak at $1.9 billion. The four-week average income showed an increase, rising by approximately $110 million to $1.74 billion per week.

• India, alongside China, remains one of the primary importers of Russian crude. Despite Western efforts to restrict Moscow's oil revenue through tougher sanctions, India's imports from Russia surged to their highest level since November. As the third-largest oil consumer worldwide, India imported 1.7 million bpd from Russia in March, marking a 9% increase compared to the previous month. However, these imports remain below the peak seen in May last year when they reached 2.2 million bpd.

Equity Markets 

• S&P, Nasdaq and Dow indexes retreated from record highs as U.S. Treasury yields rose. Energy stocks excelled as oil prices surged to their highest level since October. Nonetheless, one of the most interesting aspects of the market rally since October remains its resilience despite constant delays in interest-rate cuts. Following the trend, the equity markets have exhibited little concern regarding Friday's robust U.S. jobs report, potentially prolonging the delay in rate cuts.

Geopolitics

NATO's $100Bn aid plan for Ukraine

• NATO is developing a proposal known as the "Mission for Ukraine" aimed at securing a 5-year military assistance package of up to $100 billion. This initiative is designed to safeguard Ukraine from potential U.S political shifts including the re-election of Trump and ongoing disagreements in the House of Representatives, which has so far resulted in a blockade of a $60 billion aid package.

• NATO Secretary-General Jens Stoltenberg has spreadheaded a plan where the alliance would essentially assume control of the Ramstein Group, which was initially established by the US to coordinate military aid to Kyiv from approximately 50 Western nations. If approved, it would allow NATO to manage the supply of lethal weapons to Ukraine for the first time since Russia’s full-scale invasion in 2022.

• One unresolved aspect of this proposal is how to structure the financing, with some advocating for a funding model similar to NATO's shared budget, where the US would be required to contribute slightly over $16 billion - significantly less than initial bilateral commitment to Ukraine.

• Jens Stoltenberg would want to reach an agreement before the NATO leaders’ summit in Washington in July, given his expected departure from his post in October this year. Dutch Prime Minister Mark Rutte and Estonian Prime Minister Kaja Kallas are emerging as the top contenders to replace him as NATO secretary-general.

Our thoughts

• The proposal would necessitate the support of all 32 members and we expect the process to entail months of negotiations, with the possibility of the total budget being scaled back. It will be especially difficult to secure agreement, particularly from Hungary, a country known for regularly undermining any financial aid to Ukraine proposed by the EU, as well as Slovakia, with a pro-Russian Prime Minister and just elected pro-Russian president, and other cautious NATO members hesitant to demonstrate steps implying direct involvement of the bloc in the war in Ukraine.

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Our Further Reading Recommendations

• $60bn US aid for Ukraine is likely weeks or more away (Bloomberg)

• Pro-Russia Candidate Wins Slovak Presidency; EU is Concerned (Guardian)