by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with an update on the Russia-Ukraine war.  Both sides remain in an operational pause, of sorts, but they continue to stage limited, localized attacks on each other.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including an overview of President Biden’s trip to Israel and Saudi Arabia, which began today.

Russia-Ukraine:  Russian and Ukrainian forces remain in a partial operational pause as they focus on resting, refitting, and regrouping ahead of future attacks.  All the same, they continue to launch limited, small-scale probing and positioning attacks, especially with long-range artillery.  In particular, the Ukrainians continue to make good use of advanced artillery systems recently delivered by the West.  Reports today say they used one such system to destroy a key Russian air-defense system protecting the skies over occupied Luhansk province.

• The Russian-appointed administrator of a town in occupied eastern Ukraine has been killed in a car bombing, presumably at the hands of Ukrainian saboteurs.  Separately, occupation authorities said the Russian-installed district head of Melitopol, one of the first towns in southern Ukraine to fall to Russian forces, had escaped an attempt on his life by a saboteur shooting at his house.  The reports indicate Ukrainian partisans remain active and could cause significant casualties to Russian forces and their supporters in occupied areas.
• With President Biden and the Democratic Party still polling poorly, many observers are growing concerned that isolationist, “America-first” Republicans will shut off U.S. aid to Ukraine and open the door to a Russian victory after November’s mid-term elections.
  • Moderate, internationalist Republicans in Congress helped push that aid through in the early months of the war, before far-right opponents were able to organize resistance.  Now, far-right isolationists and admirers of Russia’s authoritarian government are better positioned to mount a concerted pushback.
  • We would note that much of the U.S. aid to Ukraine – especially the transfer of major weapon systems – ultimately flows back to U.S. defense firms and their workers.  Because of that consideration, and the risk of Russian aggression in a region where the U.S. has vital national interests, it is probably not a foregone conclusion that a Republican victory in November will end U.S. aid to Ukraine.

United Kingdom:  In the race to replace Boris Johnson as Conservative Party leader and prime minister, nominations closed yesterday with eight parliament members meeting the qualification standards.  Former Chancellor Rishi Sunak remains the front-runner, although he is facing a stiff challenge from candidates from the party’s far-right wing.

• Under party rules, an initial ballot of parliament members will be held today.  Any candidate who wins a majority of the votes will become Conservative Party leader and prime minister.  Any candidate who fails to secure at least 30 votes will be knocked out of the running.
• If needed, a second ballot is expected to take place Thursday, in which the last-place candidate and any candidate securing fewer than 30 votes will be knocked out.
• A third ballot, if one needs to take place, has been penciled for next Monday, July 18. Successive ballots are expected to take place daily on the same terms, until only two candidates remain by July 21.
• The final two candidates will then be put to a vote of grassroots Conservative Party members — thought to number around 200,000 people in total — lasting most of the summer, with head-to-head debates to be held at hustings around the country. The winner of that ballot will replace Johnson as prime minister on September 6.

China:  In Shanghai, 378 new cases of COVID-19 have been discovered across all 16 districts in the last nine days, prompting officials to reopen some centralized quarantine sites.  Many neighborhood committees have also advised residents to prepare 14 days of food and medicine.  The report serves as a reminder that China remains susceptible to tough pandemic lockdowns under President Xi’s zero-COVID policy.

United States – Israel – Saudi Arabia:  As we noted in our Comment yesterday, President Biden embarked on a four-day trip to Israel and Saudi Arabia today, where he will be seeking to repair security and economic relations.  Despite the long-term trend of U.S. leaders trying to extricate America from the Middle East, that’s proving hard to do.  Indeed, U.S. efforts to pull back from the region since at least the Obama administration have ruffled the feathers of regional leaders and created a dangerous opening for Iranian aggression; all of which Biden is now trying to reverse.

• In Israel, Biden’s first stop, the talks will likely focus on the military threat from Iran, cooperation in missile defense, and efforts to further improve relations between Israel and Saudi Arabia.
• In Saudi Arabia later in the week, the talks are expected to focus on U.S.-Saudi relations and securing a boost in OPEC oil production.  In return, reports suggest the Saudis will demand renewed U.S. commitments to the defense of the kingdom, probably in conjunction with warmer rhetoric on Biden’s part.

 Global Oil Market:  In its monthly report, the International Energy Agency cut its forecasts for global crude oil demand by approximately 250,000 barrels per day for both this year and next year, mostly because of slowing economic growth and demand destruction from today’s high prices.  The agency now sees demand rising more moderately to 99.2 million bpd in 2022 and 101.3 million bpd in 2023.  Meanwhile, the new forecasts call for global supply to increase to 100.1 million bpd this year, in part because Russian output hasn’t fallen as much as anticipated in response to Western sanctions over the war in Ukraine.

• Expectations for reduced demand and rising supply help explain the recent pullback in global oil prices.
• So far this morning, WTI is trading at approximately $96.85 per barrel, up 1.1% from yesterday but still down some 20.7% from its recent high in late June.

Global Population:  In updated forecasts, the United Nations Population Division said the world’s population will reach 8 billion in November 2022, but the annual growth rate will slip below 1% for the first time since 1950.  The global population is now projected to plateau at about 10.4 billion in the 2080s.  In other interesting tidbits, the new forecasts state:

• India will become the world’s most populous country in 2023, with more than 1.4 billion people, just ahead of China.
• The population of 61 countries is projected to decrease by 1% or more between 2022 and 2050, driven by a fall in fertility.  The biggest decliners include several countries at risk of Russian aggression including Ukraine, Latvia, and Lithuania.
• Falling fertility rates will produce a temporary “demographic dividend,” in which working-age adults will become a greater share of the population in many countries, boosting average output per capita.
• Eventually, however, the drop-off in births will boost the share of the population that is retired and elderly, creating labor shortages and putting upward pressure on public budgets.

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