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, and a discussion on the latest Ukrainian successes not only in northern Ukraine but also in the south.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including concerns about the possibility of major new strikes in the U.S. as early as Friday.

Russia-Ukraine:  Although media reports have focused on the Ukrainians’ routing Russian forces in the northern region around Kharkiv over the last week, the latest details suggest their counteroffensive to retake the southern city of Kherson is also progressing well.  Some observers have referred to the Ukrainians’ southern attack as merely a feint to draw Russian forces away from the north, but that’s probably overstating the situation.  More likely, the Ukrainians’ southern attack created an opportunity in the north that they then exploited.  As evidence of the new successes in the south, the latest reports indicate Russian forces have abandoned some of their positions to the northwest of Kherson.  We have also seen unconfirmed reports that Russian units in the area are negotiating a surrender to the Ukrainians.  Nevertheless, U.S. military officials warn that the war is far from over, and that the Ukrainians still have a tough fight in front of them.

• In a document shared with U.S. lawmakers and reviewed by the Wall Street Journal, Ukrainian officials are preparing to request a large number of new, advanced, “offensive” weapons to use as they seek to push the Russians out of their territory.  The requested weapons include the Army Tactical Missile System, or ATACMS, which has a range of about 190 miles. The wish list also includes modern tanks, drones, and artillery systems; more Harpoon anti-ship missiles; and 2,000 missiles for the High Mobility Artillery Rocket System, or HIMARS, which the U.S. began providing earlier this year.
  • Other reporting that we’ve seen suggests the Biden administration is getting more comfortable with the idea of sending more advanced weapons to the Ukrainians.
  • Along with other reports showing that the Western European nations are increasingly turning to U.S. defense firms to rebuild their military forces in response to the war, we continue to believe that the U.S. defense companies are in for a long period of strong orders.
• On the energy front, new Russian budget figures suggest falling global energy prices and Russia’s own cutoff of energy supplies to Western Europe are blowing back on Moscow.  While Russia recorded a budget surplus of almost 500 billion rubles in the first seven months of the year, the cumulative total fell to only 137 billion rubles last month, suggesting a big deficit in August which economists attributed to sharp declines in oil and gas revenues.  The deteriorating budget situation may add to the economic and political pressures on Russia, although it would probably take a while for them to reach a critical level.

Global Semiconductor Industry:  In another sign of deglobalization, shortening supply chains, and countries trying to ensure they can produce critical goods domestically, Indian industrial group Vedanta (VEDL.NS, INR, 277.55) and Taiwan technology company Foxconn (2354.TW, TWD, 49.80) said they will build an integrated computer chip and display production center in India’s province of Gujarat.  The government-backed project will cost almost $20 billion and comes on top of massive new semiconductor production capacity being planned in the U.S. and Europe.

Global Agriculture Industry:  EU officials are reportedly delaying implementation of the European Commission’s proposed “Sustainable Use of Pesticides” regulation out of fears that the required cut in pesticide use could push down crop yields and further boost food prices in the EU and globally.

• The regulation intends to reduce the amount of chemicals used in food production by 50% within the next seven years.
• The delay in implementing the rule could signal that officials around the world are now rethinking their approach to regulation as the world faces insufficient commodity supplies and surging prices.

Chinese COVID-19 Shutdowns:  Along with new Zero-COVID lockdowns elsewhere in the country, Beijing officials are taking especially stringent steps to contain their latest outbreak ahead of the Communist Party’s important 20^th National Congress next month.  The government suddenly announced yesterday that employees and students must show a negative COVID-19 test taken within the previous 48 hours to return to work and school today after the three-day Mid-Autumn Festival holiday.  The move led to chaos this morning when commuters found subway gates would not open because they could not verify their tests.  President Xi’s stringent Zero-COVID policies continue to weigh on Chinese economic activity and discourage new investment in the country, with negative implications for the global economy and financial markets.

Chinese Housing Market:  Massively indebted property developer Evergrande (EGRNY, $3.05) said it will resume construction work on all its remaining stalled projects by the end of this month and accelerate work on its other projects to a “normal” level.  The announcement likely reflects Beijing’s push to stabilize the country’s home construction market ahead of the 20^th National Congress next month.

Argentina:  In a meeting with IMF Managing Director Georgieva yesterday, Economy Minister Sergio Massa promised that Argentina would stick by its deal to reduce its fiscal deficit and trim energy subsidies in exchange for pushing back the debt payments to the IMF.

• Nevertheless, it’s important to remember that Massa is a leading figure in Argentine Peronism, which has been hostile to IMF-imposed austerity measures that could directly hurt its constituents.
• Given Argentina’s long history of breaking such deals, we suspect investors will continue to discount the country’s assets for the foreseeable future.

U.S. Labor Market:  With the massive U.S. labor shortage continuing to give leverage to employees, faltering contract negotiations are raising the risk of major strikes against the nation’s railroads and West Coast ports as early as Friday.  Key railroads have already warned they will restrict shipments of hazardous chemicals so they would not be left unattended in the event of a work stoppage.

• In addition, some 15,000 nurses in Minnesota launched a three-day strike yesterday as they push for a roughly 30% pay hike over three years.
• The potential railroad and port strikes could be especially damaging to the economy as they would further snarl the supply shortages that have been disrupting activity over the last year or more.  And of course, that would likely exacerbate the current high level of inflation.

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