Hey There Income Hunter,

Here we go again …

Another desperate move by desperate “leaders.”

G7 ministers have agreed on a price gap for Russian oil.

Here is how it works …

Countries that have not imposed outright import bans on Russian oil can now import oil if it is purchased below a predetermined price. 

This will be enforced via limits on European freight insurance and US finance for Russian oil cargoes. The cap is expected to be priced at $60 per barrel, which is a $20 discount to the current Ural grade. 

The cap will kick in Dec. 5, which is a lot of time for the market to come unglued due to all the ramifications this cap could trigger …

Today, I’ll lay out the possible ramifications based on Putin’s initial response.

First let’s take a look at why the initial sanctions did not work …

China Fills the Void

The graph below tells the sanction backfire story … 

Notice the shift to much greater trade numbers between Russia and China – especially the increase in China’s imports, which more than doubled the levels pre-Covid.

China’s imports from Russia this August blew away previous months (red bar, ironically). Now, itt is mostly due to price discounts and spread out across countries. 

Notice, also, how China’s August exports to Russia reached an all-time high (blue bar) this year…

So, what the US and Western allies missed was how quickly China could replace the western demand.

Ukraine Needs the Price Cap

The price cap is as much about Ukraine as it is Russia.

Ukraine is running out of cash since it is not bringing in the revenues it was prior to the invasion. 

Ukraine is losing $15 billion a year while Russia continues to suck up the revenues for its energy exports. 

So, a solution is certainly necessary, but Putin is still holding all the cash and the oil and Putin is using oil to bury the Euro banking system.

The European banking system is in full blown crisis, and now the ECB is expected to HIKE rates!

The IMF urged the EU to revamp its fiscal framework amid high debt and rising interest rates,

saying the reforms are critical to avoid a debt crisis.

European Banks Credit Spreads Near Covid Levels

Putin’s announcement on reduction of Nord Stream 1 output is significant since it was a direct retaliation for the G7 price cap agreement. 

The credit risk in the UK, Europe and the US is what everyone should be worried about, not when/if the Fed should pivot …

Bring It Home

It has always been, and always will be, about the numbers … 

Balance sheets were already beaten up by Covid. Now the destruction to the consumers and businesses due the energy crisis is making it much worse.

Here is what you have to look forward to in the next month 

Sept. 8: ECB rate decision 

Sept. 9: EU emergency energy meeting 

Sept. 13: US CPI 

Sept. 15: BoE 

Sept. 16: UMich prelim 

Sept. 21: FOMC 

Sept. 24: Italian Elections 

Dec. 5is a long way away to see how the Oil price gaps work. The markets will respond to the financial stress of raising rates into a massive energy crisis.

Traders should consider buying a bearish strategy on the iShares High Yield Corporate bond ETF (HYG) after this week’s rally near the $75 level. 

Questions? Drop them in the comments below or shoot me an email.

In the meantime …

Live and Trade With Passion My Friend,

Griff