by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s Comment will keep our focus on the Russian invasion of Ukraine. We are seeing a modest “risk-on” this morning due to reports that Russia is open to talks on Ukraine.  We have our doubts about Moscow’s sincerity, but the news, on its face, is positive.

The Russian assault on Ukraine has entered its second day. The onslaught has started to become broader in its scope. On Thursday, Russian troops took over the Chernobyl nuclear plant and are holding the staff hostage. Additionally, Russia has engaged in cyber warfare, attacking several of Ukraine’s banks and government offices, and several cities have seen a decrease in their internet connectivity. Ukraine remains resilient in the face of the bombardment, but it has now resorted to extreme measures as it tries to protect its homeland. Ukrainian President Volodymyr Zelensky has ordered males aged 18-60 to stay in the country and help fight. The latest report shows Russian forces are now closing in on Kyiv, and Zelensky has warned he has been placed on a kill list. Russia has pledged to persist with these attacks until Ukraine surrenders but stated it is willing to meet in Minsk for talks. President Zelensky has indicated he will not surrender but is open to talks. Reports from U.S. intelligence officials are concerned that Kyiv could fall to Russia within days, and conditions will favor Russia.

Over the next few days, Western countries’ ability to stay united will probably dictate whether or not Russia will feel emboldened. The biggest impediment appears to be Europe. Russia depends on Europe to sell its fuels and receive payments, so a blockade from receiving euros could potentially be a death knell to the Russian economy. However, Europe is very dependent on Russia for its energy needs; therefore, pain will be felt by both if Europe follows through with banning Russia from receiving euros. As the cost of inaction rises over the next few days, Europe will be more inclined to act. So far, we are not confident Europe is willing to go to the extreme to defend Ukraine, but if other countries are harmed, this may change. As a result, we suspect there will be a lot of market volatility as the situation plays out.

The West appears to be treating Ukraine as a prelude to a broader conquest into Eastern Europe and has been slowly hinting at the possibility of direct conflict with Russia if any NATO members are harmed. President Biden stated the U.S. is prepared to defend its NATO allies in the event of an attack from Russia. The U.S. plans to send 7000 additional troops into Germany to reinforce its defenses. Meanwhile, Putin claims he fears Ukraine may be developing nuclear weapons. Although there is no evidence of this being true, it suggests that he resents the fact that Russia is being treated differently than the U.S. when it invaded Iraq. To further voice his frustration, for what he feels to be a double standard, he vaguely threatened the West with nuclear war. Putin warned that intervention from the West will be met with “consequences that [they] have never encountered in [their] history.” Thus, the risk of a broader conflict within Europe remains elevated.

The Ukraine crisis is already starting to impact other countries. In Europe, the UEFA Champions League has moved its championship final from St. Petersburg to Paris. In China, importers have temporarily stopped the seaborne purchases of Russian oil while evaluating the potential implications of handling these shipments.  Additionally, food inflation will probably increase as a conflict in the black sea will limit shipments of commodities such as wheat. In the U.S., Cargill, an agricultural food company, stated its ship was hit while sailing in the Black Sea.

 Non-Russia-Ukraine news:

• The Federal Reserve appears to be undeterred by what is happening in Ukraine and is prepared to hike rates in its next meeting in March. Central bankers Loretta Mester and Raphael Bostic both stated they support a lift-off in rates at the next Fed meeting. Meanwhile, Fed Governor Christopher Waller said he is willing to support a 50 bps hike in March if the data keeps coming in hot.
• President Biden is expected to nominate Judge Kentaji Brown Jackson to the Supreme Court.

COVID-19: The number of reported cases is 431,799,542, with 5,930,216 fatalities.  In the U.S., there are 78,799,264 confirmed cases with 944,831 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 688,186,745 doses of the vaccine have been distributed, with 551,855,907 doses injected.  The number receiving at least one dose is 253,307,984, while the number of second doses is 215,253,201, and the number who have received the third dose, granting the highest level of immunity, is 93,643,962. The FT has a page on global vaccine distribution.

• • The first plant-derived COVID vaccine won approval from Canada. Covifenz was developed by GlaxoSmithKline(GSK, $41.19) and Medicago (PLN, $12.38).
  • China has ordered Hong Kong to contain the spread of the COVID-19 by July.

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