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, where there is increasing evidence that the Russian army is collapsing, at least in some specific areas.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including a preview of an important OPEC+ meeting and a discussion of yesterday’s JOLTS report in the U.S.

Russia-Ukraine:  Ukrainian forces continue to recapture significant swaths of territory in Ukraine’s northeastern Kharkiv and Luhansk provinces and in the southern region around Kherson, in part by utilizing tanks and other equipment recently captured from the retreating Russians.  At the same time, the Russians are continuing to stage unsuccessful ground attacks in the northeastern region of Donetsk, while also continuing to conduct artillery and missile strikes against civilian infrastructure throughout Ukraine.  Ukraine’s advances and Russia’s poorly executed mobilization of reservists (discussed below) are now generating increased disputes and disagreements among key supporters of President Putin, putting him in a difficult political spot.  On top of that, reports indicate that the new call-up of troops is depleting the nation’s police and security forces, making it more difficult to control popular unrest.

• At least one Russian source says that the Russian army around Kherson is collapsing catastrophically after Ukrainian forces broke through their lines and ran all the way to the coast, cutting off thousands of Russian troops with no hope of receiving reinforcements or supplies. If true, that event would likely cause even greater criticism of Putin.
• Meanwhile, Defense Minister Shoigu announced that Russia has already mobilized 200,000 of the 300,000 new troops it called up in late September. However, even if that figure were accurate, multiple sources say the call-up continues to suffer from a range of problems, including an acute shortage of officers to train and lead the new troops.
• On the energy front, EU officials are reportedly preparing to implement the G-7’s proposed cap on Russian oil prices in two stages. The officials are preparing legislation needed to implement the measure, but they will hold off approving it until the rest of the G-7 is ready to move forward.  The plan reflects the difficult politics involved in imposing any sort of trade restrictions on Russian energy.

Global Oil Market:  The Organization of the Petroleum Exporting Countries and their Russia-led partners are meeting in-person today for the first time in years to discuss a production cut of up to 1.5 million barrels per day.  Not all the members are supporting the cut, but now that the UAE has thrown its backing behind Saudi Arabia and Russia in supporting the idea, it appears that a significant reduction in output is likely.  That could help boost energy prices again, with negative impacts for consumer price inflation and the electoral prospects of Democrats in next month’s mid-term elections in the U.S.

• Meanwhile, the chief of Saudi Arabia’s state oil company, Saudi Aramco (2222.SR, SAR, 35.95) warned that the world is too focused on the near-term demand impact of a possible recession rather than the limitations of supply.
• The official said that the global oil market remains extraordinarily tight, in large part because of under-investment in new supply in recent years, and that prices could skyrocket in response to a demand shock like a stronger-than-expected rebound in the Chinese economy.

Germany-Poland:  Yesterday, the Polish government signed an official note to Germany requesting the payment of $1.3 trillion in reparations for the damage incurred by occupying Nazi Germans during World War II.  The Polish foreign minister also asked that Germany solve the issue of looted Polish artworks, archives, and bank deposits.  In our view, the demands are further evidence of the fracturing of political ties in Europe, especially after Germany’s recent actions to give itself a competitive advantage in the evolving European energy crisis.

United Kingdom:  Just as Continental Europe’s industrial base has been impacted by the war in Ukraine, thousands of British businesses are now closing or retrenching in response to skyrocketing energy prices, rising interest rates, and falling demand.  The reports confirm that U.K. stocks may be among the most vulnerable as Europe’s energy crisis continues to worsen this winter.

Japan-South Korea:  Japanese Prime Minister Kishida and South Korean President Yoon plan to talk by telephone on Thursday to discuss North Korea’s recent provocative missile tests, one of which overflew Japan.  The call not only illustrates how Japan and South Korea are beginning to coordinate more closely on national security issues, including against China, but it also shows that Kishida and Yoon remain committed to rapprochement after many years of tensions between Japan and South Korea.

Brazil:  As results from Sunday’s elections are finalized, it appears that both left-wing and right-wing parties have gained seats in the country’s parliament, but neither has won enough to dominate the body.  That’s good news for investors, as it will require alliances to pass legislation, and therefore will reduce the chance of radical new policies, no matter who wins the upcoming presidential run-off election.

Uganda:  Over the last two weeks, officials have counted more than three dozen cases of the Sudan strain of Ebola, for which there are no proven vaccines or antiviral treatments and which can’t be detected by rapid tests.  Officials fear there are many more unknown cases, including in areas frequented by Western tourists.

U.S. Economy:  The monthly JOLTS report yesterday showed employers’ total job openings fell 10% in August to a seasonally adjusted 10.1 million from 11.2 million the month before.  The apparent drop in labor demand was taken as an important sign that the Federal Reserve’s interest-rate hikes are having their intended effect, boosting hopes that inflation will soon fall and reduce the need for further rate hikes.

• The report was key to sparking yesterday’s big rebound in the stock market, which pushed the S&P 500 price index up 2.6% to 3,774.75.
• We would note, however, that the JOLTS report was all positive. The report also showed that quits and layoffs in August were little changed.

U.S. Monetary Policy:  Despite the economic slowdown evident in the JOLTS report and some other economic indicators, yesterday Fed board member Philip Jefferson warned that bringing consumer price inflation down to acceptable levels will take time and require a bigger slowdown in economic growth and labor demand.  Importantly, he said that the labor market remains very tight, suggesting that he would support continued increases in interest rates despite the market’s hope for a reprieve in the near term.

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