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, including reports that Iranian military personnel have been deployed to Russian-occupied Crimea to help Russian forces operate their Iranian-supplied drones.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including news that the Biden administration is planning further sales of crude oil from the country’s Strategic Petroleum Reserve in a bid to hold down energy prices.

Russia-Ukraine:  As Russian forces remain under pressure in both the northeastern Ukrainian region of the Donbas and the southern region around Kherson, they continue to strike back with waves of missile, air, and kamikaze drone attacks on Ukraine’s civilian infrastructure.  New reports indicate that members of Iran’s Islamic Republican Guards Corps have deployed to Russian-occupied Crimea to either advise the Russians on how to make better use of their Iran-supplied drones or to operate those drones themselves.  The presence of the Iranians illustrates how the war could potentially widen over time.  Indeed, some European officials have already called for tougher sanctions on Iran because of its support for Russia (the situation is also rapidly pushing European officials toward giving up on re-instituting the 2015 deal limiting Iran’s nuclear program).  A Ukrainian strike on Crimea that killed IRGC members could be especially dangerous since it could encourage even greater Iranian involvement in the conflict.

• General Sergei Surovikin, the newly appointed commander of Russia’s invasion force, warned yesterday that the situation was “not at all easy” for his troops trying to hold Kherson, and that “difficult decisions cannot be ruled out.”   The statements probably aim to prepare the Russian people in case the military is forced to abandon the city in the coming days, as appears increasingly likely.
• Russian authorities in occupied Kherson are reportedly moving thousands of Ukrainian citizens out of the city and deeper into Russian-held territory, ostensibly to protect them from the Ukrainian military’s upcoming assault, but also likely as bargaining chips or to keep them from helping the Ukrainian military once it regains the city.

Global Energy Market:  Spot rates for liquified natural gas tankers have risen to yet another record this week of approximately $450,000 per day, compared with a range of just $30,000 to $300,000 in 2021.  The jump in rates illustrates how the energy-supply disruptions from the war in Ukraine have increased demand for LNG.  Spot rates for LNG tankers are expected to keep rising during the winter.

United Kingdom:  As shown in the data tables below, the U.K.’s September consumer price index was up 10.1% year-over-year, accelerating from the 9.9% increase in the year-to-August and matching the highest rate in four decades.  After stripping out the volatile food and energy components, the September Core CPI was up 6.5%, accelerating from a 6.3% rise in the year-to-August.  The re-acceleration in inflation ensures that the Bank of England will implement another big interest-rate hike at its next policy meeting in November.

China-United Kingdom-Australia:  The British and Australian militaries are both investigating reports that some of their former air force pilots were offered lucrative financial deals to teach Chinese pilots how to fly western attack aircraft.  The approaches were made through a flight school based in South Africa.  According to a British official, some serving pilots were also solicited.  The incident suggests China is looking for ways to better understand and learn Western war-fighting skills as it ramps up its own military forces.

China-Taiwan-Japan:  The world’s most important manufacturer of advanced computer chips, Taiwan Semiconductor Manufacturing (TSM, $63.71) is reportedly considering expanding its fabrication capacity in Japan to reduce its geopolitical risk.  As we have long highlighted, the company is at risk as China puts increasing political, economic, and military pressure on Taiwan to reunify with the mainland.

• The company has already begun building new capacity out of harm’s way, including in the U.S.
• The latest reporting suggests that the company will continue to diversify its production capacity in the future.

Turkey:  To bolster his chances for re-election in an upcoming poll, President Erdoğan has launched a $50-billion, state-subsidized housing construction program for lower income citizens.  More than seven million have already signed up for the new housing units.  Of course, the increased spending will likely exacerbate Turkey’s sky-high inflation and put further downward pressure on the lira.

U.S. Energy Market:  Today, President Biden plans to announce that the Energy Department will sell the last 15 million barrels of crude oil out of the 180 million barrels he authorized for sale from the Strategic Petroleum Reserve in March.  He will also direct the Energy Department to prepare for more sales from the approximately 400 million barrels left in the reserve if Russia or other petroleum-producing nations continue to disrupt world markets.  The sales to date have helped push down prices for gasoline, diesel, jet fuel, and other petroleum products that had been driven up by supply shortages related to the war in Ukraine.

U.S. Labor Market:  Workers for Amazon (AMZN, $116.36) in upstate New York voted against unionizing, despite a successful unionization vote at an Amazon facility on Staten Island earlier this year.  Even though the tight U.S. labor market has generated successful unionization drives at a range of service companies recently, the Amazon vote shows that the trend isn’t universal or set in stone.

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