by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with the latest on Canada’s allegations that India assassinated a Canadian citizen in British Columbia in June.  The resulting strain on Canadian-Indian relations could have big implications for the U.S.’s effort to use India as an economic and geopolitical counterbalance to China.  We next review a range of other international and U.S. developments that could affect the financial markets today, including an effort by China to boost its stock market by limiting insider share sales and a tentative deal to end the U.S. screenwriters’ strike.

United States-Canada-India:  Reports over the weekend said U.S. intelligence helped Canada conclude that Indian agents were involved in the June assassination of Sikh separatist leader Hardeep Singh Nijjar near Vancouver.  The U.S. information included not only the regular reports provided to Canada as a member of the “Five Eyes” intelligence-sharing partnership that includes the U.S., the U.K., Canada, Australia, and New Zealand, but it also included additional reports specifically aimed at providing further context for the reports related to the assassination.

• Despite the U.S. assistance, the reports indicate that Canada’s conclusion about India’s involvement relied mostly on Canada’s own communication intercepts.
• Nevertheless, the U.S. role could complicate the Biden administration’s effort to draw India closer to the U.S.-led geopolitical and economic bloc as a counterweight against China’s growing power.

China-Philippines:  China’s coast guard and maritime militia forces have installed a 300-meter floating barrier to keep Philippine fishing boats out of a disputed shoal in the South China Sea just 140 miles from the Philippine coast.  The development is additional evidence that China is ratcheting up its harassment of Philippine interests in the area as punishment for Manila’s recent move to rebuild its security alliance with the U.S.

China:  In a further move to bolster China’s flagging stock market, authorities in Beijing have reportedly banned controlling shareholders of listed companies from selling their stock if their firm hasn’t paid a dividend for the last three years or if the company is trading below its initial public offering price or net asset value.  The new rules reportedly apply to more than half of the 5,000 or so stocks listed on Shanghai and Shenzhen.  The rules have also already led to the cancelling of insider share sales at more than 200 companies.

Russia-Ukraine War:  On Saturday, the New York Times revealed that the U.S. Army’s Landstuhl Regional Medical Center in Germany is treating a small number of Americans who were wounded in Ukraine after volunteering to help fight the invading Russians.  According to the report, the Defense Department last summer authorized the hospital to treat up to 18 members of the Ukrainian armed forces at a time, but a substantial percentage of those treated have been Americans who had previously served in the U.S. military or had served as former soldiers of other NATO allies.  The report has the potential to be seen as further evidence of creeping U.S. involvement in the war.

• Separately, Ukraine continued its recent missile and drone attacks on Russian-occupied Crimea over the weekend, forcing Kremlin-allied authorities there to issue air raid warnings. The attacks appear designed to disrupt Russia’s ability to launch its own air attacks against Ukraine’s grain exports and energy infrastructure.
• Importantly, Ukraine has stepped up use of its newly declared safe corridor for food shipments out of its southeastern ports. Last week, two ships laden with Ukrainian wheat successfully used the corridor, and three more ships are expected to use it to carry Ukrainian food exports in the coming week.  Continued Ukrainian food exports would help preclude a spike in global grain prices.

Japan:  Start-up pharmaceutical company Toregem BioPharma said it’s preparing to start clinical trials for a new drug that would spur the growth of new teeth in people who have lost both their baby and adult teeth.  The drug, which the firm hopes to have on the market by 2030, could help take a bite out of a problem many older people have in aging societies like Japan.

U.S. Economic Data:  As a “heads up,” the Bureau of Economic Analysis will issue updated and corrected figures on Thursday for gross domestic product, price inflation, corporate profits, and other key indicators for the last ten years, along with its third regular estimate of second-quarter GDP growth.  There is a significant chance that the revisions will show recent GDP growth has been weaker than initially reported.  Just as important, the figures for consumer inflation as measured by the price index for personal consumption expenditures could be revised upward, which would likely affect how policymakers at the Federal Reserve approach monetary policy in the coming months.

U.S. Fiscal Policy:  The House of Representatives has again failed to start passing the funding bills needed to avert a partial government shutdown this coming weekend.  Top Republican and Democratic lawmakers yesterday warned that time is running out to pass the appropriations bills that would keep operations funded after the current fiscal year ends on Friday.  Several House Republicans who are insisting on deep spending cuts are the key holdups.

U.S. Labor Market:  The Writers Guild of America and the major Hollywood studios have struck a tentative deal on a new labor contract, potentially ending the screenwriters’ strike that has hobbled movie and television production for months.  The negotiators are still ironing out the final details of the three-year contract before putting it to a vote by the union members, but it looks like the workers will win a number of concessions, such as increased royalties, minimum staffing levels, and protections related to artificial intelligence.  In turn, those concessions would likely encourage the still-striking Screen Actors Guild to hold out for a better deal.

U.S. Energy Market:  Data last week showed the average price for regular unleaded gasoline has reached $3.88 per gallon, up more than 25% from the start of the year.  The increase in cost reflects a recent surge in global crude oil prices stemming from strong demand, low inventories, and production cuts by countries such as Saudi Arabia and Russia.

• The jump in energy costs is especially concerning given that U.S. economic growth is already moderating in response to the Federal Reserve’s interest-rate hikes. When growth is slow, it may only take a small hiccup in demand to push it into recession.
• We call this the “slow bicycle economy,” since it’s so similar to the situation where it becomes very hard to keep your balance on a bike when you slow down too much.
• For all of today’s talk among investors about a hoped-for soft landing (in which growth slows enough to bring down consumer price inflation), that would also be something like a slow-bicycle economy where activity could be at risk if energy prices rise too much, if there is a partial government shutdown, or if there are some other hits to demand.

Global Artificial Intelligence:  If you think the wonders of artificial intelligence are simply divine, you’re going to love this.  Clerics in Iran’s theocracy are reportedly exploring the use of AI to write fatwas, or religious edicts.  Even the country’s supreme leader, Ayatollah Khamenei, has urged the clergy to pay more attention to the possibilities of AI, saying he wants Iran to be “at least among the top-10 countries in the world in terms of artificial intelligence.”

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