Report 26/11/25Report Summary
Kyiv has told Washington it is prepared to sign a U.S.-drafted framework to end the war, a plan that, crucially, was informed by consultations with the Kremlin. The Wall Street Journal reports the draft came from the Trump administration’s special envoy and that Moscow’s input shaped key sections; the White House sees it as the fastest path to halt fighting and unlock reconstruction finance. Ukraine’s signal of receptivity is the first clear public step toward a negotiated endgame in many months.
Independent reporting indicates the U.S. draft is broadly consistent with a stream of “peace principles” circulated to allies this month; terms range from cease-fire and demilitarized zones to security guarantees and phased sanctions relief tied to compliance. Reuters confirms a U.S.-backed proposal is in play and being briefed in allied capitals. Markets responded with a familiar “risk-on in cyclicals / risk-off in defense & energy beta” intraday pattern, while the Journal’s markets desk flagged choppy equity trade into the U.S. holiday week as investors weighed the peace headlines against a heavy AI earnings calendar and delayed labor data.
A parallel European track matters for financing: Brussels is pushing ahead with an EU plan to mobilize the windfall profits from frozen Russian assets into a large loan program for Kyiv, despite U.S. proposals that would channel more of those assets into American-led investment vehicles. If EU leaders sign off, that structure would provide multi-year disbursements and legal cover for European banks to participate. Together, the diplomatic movement and funding design shift the distribution of macro risks away from a prolonged attrition war toward a negotiated freeze with staged sanctions relief, still highly uncertain, but credible enough for markets to begin repricing tail risks.
Macro context you should factor in now
Europe’s growth engine is sputtering. In a notably blunt speech, ECB President Christine Lagarde warned the bloc’s “old” export-heavy model has become a vulnerability, urging policymakers to remove internal market barriers and strengthen domestic demand; she underscored that six years of inaction would lock in a lower growth path. That stance implies a bias to keep rates on hold and to lean on structural policy rather than monetary easing to revive growth. At the same time, Vanguard cautions that markets are pricing too many Fed cuts for 2026–27 given the ongoing AI-capex boom that is supporting U.S. growth and may limit how far policy can ease without reigniting inflation.
In Asia, Japan’s new prime minister Sanae Takaiichi has unveiled a ¥21.3tn (≈$135bn) package, Japan’s largest since the pandemic, mixing household subsidies with tax cuts. The fiscal impulse has pushed JGB yields to multi-decade highs and kept the yen under pressure, even as foreign investors stepped in to buy long-dated paper at the fastest pace in more than two decades. Expect the MoF/BoJ to keep FX-intervention optionality alive if volatility spikes.
Finally, Western capitals are coordinating a response to Chinese steel overcapacity, an OECD-anchored process that could harden into tariff-quota regimes in 2026. That’s a medium-term positive for EU/U.S. steel margins, but it’s also another wedge in the global goods dis-inflation story and one more lever on bilateral frictions.
Market reactions and positioning (near-term, then 3–12 months)
S&P 500 / Dow Jones. Equity indices traded choppy but resilient as investors rotated within cyclicals: a cease-fire path reduces left-tail risks on energy costs and European growth, while AI capex continues to anchor U.S. earnings visibility. Into year-end, breadth should improve if peace odds rise and if bond volatility eases alongside Japan’s policy clarity. Base case: mild multiple support and “quality-cyclical” leadership (industrials, select financials) over pure defensives. Risk case: talks stall and oil spikes; or U.S. data re-accelerate too much, forcing repricing of Fed cuts.
DXY / USDJPY. The peace track is modestly dollar-negative through the energy channel and European risk premium, but Japan’s outsized fiscal push and high JGB term premia are yen-negative. Netting those, USDJPY likely remains bid on rallies unless BoJ signals faster balance-sheet adjustments or MoF intervenes. Watch the 150–158 corridor as intervention-risk territory.
XAUUSD (Gold). A credible cease-fire path trims the geopolitical bid for gold at the margin; however, if markets scale back the number of Fed cuts after strong AI-led capex, real yields could firm and further cap upside. Conversely, any breakdown in talks or an escalation around sanctions-for-compliance would quickly restore safe-haven demand. Net: tactically neutral/slightly lower with strong dip buying below key moving averages.
Crude oil. Risk premium eases on peace momentum and EU financing clarity. Brent’s downside is cushioned by OPEC+ discipline and low OECD commercial stocks, but the path of least resistance is lower volatility and a gradual grind toward the marginal-cost band if a freeze holds. Keep an eye on any carve-outs in the U.S. plan that adjust Russian export constraints; these would feed directly into term structure.
European equities / banks. A peace pathway and EU loan architecture are constructive for battered EU cyclicals and select banks via lower energy costs, better NPL outlooks in CEE exposures, and potential steepening if fiscal overhangs are credibly financed. The counterweight is Lagarde’s “new model” push, which accepts slower trade-led growth—so stock selection will matter.
Forecasts
In the next 1–3 months, the negotiation calendar itself will drive variance. Expect alternating bursts of optimism and risk-off: drafts circulated to allies, leak-driven disputes over security guarantees, and EU legal work on the asset-profits loan will each move cross-assets. Base case (55%): a de-facto truce framework emerges with monitoring and staged sanctions relief linked to compliance; energy vol compresses; European PMI troughs look durable. Bear case (30%): talks stall on territory/sequencing; sanctions tighten; commodity vol revives. Bull case (15%): cease-fire plus rapid reconstruction commitments pull forward capex and Europe outperforms.
On a 6–12 month horizon, the contours of post-war financing matter most. If the EU loan goes ahead, with windfall-profit capture from immobilized assets, it creates a predictable disbursement channel that encourages private lenders to re-enter Ukrainian infrastructure and housing with multilateral guarantees—a modest positive impulse for European capital-goods and specialty materials. U.S. domestic politics will determine whether Washington emphasizes sanctions relaxation for compliance (market-friendly) or leans on secondary sanctions to enforce terms (dollar-positive, EM risk-negative).
Fiscal and political implications
For Europe, Lagarde’s call to dismantle internal market barriers and double-down on domestic strengths signals less willingness to “buy growth” with rate cuts and more pressure on capitals to pursue supply-side reforms. That stance, combined with a Ukraine-funding mechanism housed in EU law, should keep periphery spreads contained so long as growth doesn’t undershoot.
For the U.S., an endgame that pares back energy volatility and reduces headline inflation noise helps the Fed achieve disinflation without over-easing. Vanguard’s warning on “too many cuts priced” suggests a risk that the policy path stays firmer for longer if AI-capex remains torrid, supportive of the dollar versus low-yielders, but not versus a reforming Europe if energy risk fades.
For Japan, the stimulus-driven rise in yields, paired with foreign demand for duration, underscores a regime change away from yield-curve-control: global term premia will take their cue from JGBs as much as from U.S. Treasurys on big days. FX-intervention risk rises with each new fiscal headline if USDJPY surges into the high-150s.
Key risks to monitor
First, talks unravel: if territorial language or sequencing of sanctions relief becomes a deal-breaker, oil and gold spike, the dollar catches a safety bid, and European equities underperform again. Second, EU legal friction: if member-state courts or the ECB contest the asset-profits loan structure, Ukraine financing could slip, risking a cohesion shock. Third, policy mistake in Japan: an overly large supplementary budget or clumsy signaling could disorder the JGB market and spill into global rates, pressuring long-duration equity multiples. Fourth, trade flare-ups: coordinated steel defenses in 2026 would be inflation-neutral to slightly positive and geopolitically sensitive if China retaliates.
Actionable takeaways by asset
XAUUSD: Fade spikes on positive-headline days; keep a core tail-risk hedge given non-trivial negotiation failure risk. Correlation to real yields likely reasserts if peace odds rise.
S&P 500 / Dow: Favor quality cyclicals (industrials, rails, select banks with EU/CEE exposure) and capex beneficiaries; underweight pure energy beta until the talks path is clearer.
USDJPY / DXY: Maintain a buy-the-dip bias in USDJPY with tight risk controls around known MoF-watch levels; DXY path modestly lower if Europe’s energy risk premium collapses, but resilient versus JPY.
Crude: Expect lower vol and mild contango if cease-fire contours harden; hedge upside tails via call spreads into each major negotiating round.
European equities: If EU financing clears and peace momentum holds, rotate toward European capital-goods, building materials, and quality small/mid financials; avoid names most levered to wartime energy spreads.
