by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report will continue with our focus on the Russian invasion of Ukraine. Afterward, we discuss non-Ukraine-related news and close with our pandemic coverage.

President Biden plans to meet with NATO and EU leaders on Thursday to discuss imposing tougher sanctions on Russia. The new sanctions are expected to be more targeted but will likely not result in the banning of Russian oil and gas in Europe. The push to tighten sanctions comes amid growing speculation that Russia will look to use nuclear or chemical weapons in Ukraine.  NATO Secretary-General Jens Stoltenberg has stated that using such weapons would likely signal an escalation of the conflict, but he failed to call it a red line. On Wednesday, NATO countries sent additional resources to Ukraine to help defend itself from such an attack.

From our perspective, the use of nuclear weapons by Russia likely carries more risk than the country is willing to bear. As mentioned in a previous report, Chinese President Xi Jinping signed a pledge to protect Ukraine from a nuclear attack; thus, Beijing may be forced to respond to Russia if such weapons are used in the conflict. How China may respond is unclear because the pledge does not go beyond an agreement to defend Ukraine. However, it will most likely come in the form of a reduction in sanctions relief for Russia. Note that China has publicly come out in support of Russia by spreading many of the talking points promoted by the Kremlin. There isn’t much evidence that China has tried to evade the sanctions, suggesting that Beijing is still not ready to put all of its eggs into one basket by supporting Russia.  There is even some speculation that China may be trying to distance itself from Russia as the conflict with Ukraine escalates. That being said, the lack of support from China does not mean that there is no possibility of a nuclear or chemical attack from Russia but suggests the costs would likely exceed the benefits. As a result, we suspect the uncertainty in markets because of the Russian invasion will likely persist for the foreseeable future as there doesn’t appear to be an off-ramp for either Russia or Ukraine at this point.

• In other news, Russian President Vladimir Putin has asked countries to pay for their oil and gas using rubles. The move comes as the country continues to struggle to deal with the economic ramifications of the sanctions. An article from the WSJ details the impact of sanctions on Russia’s oil and gas industry despite the fact that Russian energy companies, for the most part, have not been targeted. Although in the short run, the demand for rubles will lead to an appreciation of the currency against the dollar. The sudden change in form of payment is almost certainly a breach of contract and will most likely be challenged in court. So far, Putin has given no indication that he is preparing to cut Europe off. However, this suggests Russia is considering weaning itself off Western currencies in general as it positions itself toward autarky. Putin’s announcement has led to an increase in commodity prices and the ruble.
  • The Russian stock market partially reopened on Thursday after being closed for a month following the country’s invasion of Ukraine.  On its opening, the stock market rose as high as 12 percent before paring back much of its gains. The rise should not come as a surprise, as western investors, who own up to 80% of the free-floating market, were prevented from selling. Additionally, short selling was banned. The move comes as Russia attempts to rebuild trust in its equity markets and avert a financial crisis. To support its stock market, the Kremlin plans to inject over one trillion rubles ($10.3 billion) into the market from the country’s National Wealth Fund.
• In Ukraine, officials announced it struck a Russian-occupied port facility, suggesting the country is still finding some success in holding off Russian forces. The port was an important logistic hub for Russian forces, and the act provides further evidence the war is not close to ending.
• The Biden administration is expected to ask for $813.3 billion in national security spending in the federal budget for the next fiscal year.

Non-Ukraine news:

• San Francisco Fed President Mary Daly has indicated that the Federal Reserve could raise rates 50 bps in addition to a reduction of its balance sheet at its next meeting. Her comments provide more evidence that the Fed is becoming more hawkish as it attempts to contain inflation.
• A new metric designed by French bank BNP Paribas suggested that the U.K. is the second most unsustainable, behind Latvia, of the 36 economies that it tracks. The ranking comes as the country struggles with rising inflation and wealth inequality. Additionally, uncertainty regarding the Northern Ireland Protocol is the most visible sign of future unrest within the country.
• Germany will announce a package designed to ease the burden of soaring energy costs on households. The package includes subsidies for low-income households, an increase in the allowance for commuters, and a cut in fuel taxes.
• North Korea launched what is considered its first intercontinental ballistic missile in four years. The missile was the country’s most successful launch so far.

COVID-19: The number of reported cases is 475,935,572, with 6,105,530 fatalities.  In the U.S., there are 79,844,751 confirmed cases with 974,833 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 699,566,225 doses of the vaccine have been distributed, with 558,918,245 doses injected. The number receiving at least one dose is 255,001,325, while the number of second doses is 217,184,868, and the number of the third dose, granting the highest level of immunity, is 96,874,549. The FT has a page on global vaccine distribution.

• There is a global push to reduce COVID-19 restrictions, even as some countries struggle with the current wave of cases. Singapore expects to lift most of its restrictions for vaccinated travelers. Meanwhile, airlines have urged Biden to lift mask mandates for flights and COVID-19 testing for foreign travelers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Once again, our Comment opens with an update on the Russia-Ukraine war, where the leading news over the next couple of days is likely to be the major allied diplomatic meetings in Europe.  We next review a range of international and U.S. developments with the potential to affect the financial markets today.  We conclude with the latest news on the coronavirus pandemic.

Russia-Ukraine:  Russian invasion forces remain essentially stalled in northern and eastern Ukraine, while the Ukrainian defenders are reportedly mounting modest counterattacks in an effort to push them back or at least disrupt their ongoing resupply efforts.  The Russians appear to be making some progress in consolidating their hold on the country’s southeastern coastline, but vicious street fighting continues in the city of Mariupol.  According to U.S. defense officials, more than 10% of Russia’s invasion troops have been killed or wounded and are no longer in the fight.  To make up for those losses and regain momentum, Russian President Putin appears to be pressuring Belarusian President Lukashenka to throw his troops into the battle.  However, Ukrainian military officials say Lukashenka and the Belarusian military strongly resist that idea, at least for the time being.

• President Biden left yesterday for a summit of NATO leaders in Brussels to be held tomorrow and other allied meetings later in the week.  Reports indicate Ukrainian President Zelensky will address the NATO meeting by video link. U.S. National Security Advisor Sullivan said the agenda items for the meetings would include:
  • Imposing further sanctions on Russia and tightening the existing sanctions, including a possible European ban on importing Russian oil and natural gas, although Germany continues to resist that idea;
  • Beefing up NATO’s military force posture on its eastern flank;
  • Steps to enhance Europe’s energy security and reduce its heavy dependence on Russian gas;
  • Steps to deal with the massive humanitarian crisis touched off by the war, including the mass flow of refugees into western Europe; and,
  • Resolving other prior disputes among the allies that could distract them from dealing with the Russia crisis, such as trade and technology disagreements.
• Separately, Russia’s deputy energy minister said storm damage would reduce oil flows through the Caspian Pipeline Consortium’s pipeline from central Asia to the Black Sea by up to one million barrels per day for the next two months.  The announcement could be a subtle way to warn that Russia could strike back at the U.S. and its allies by shutting off its own energy exports.
  • Underscoring those fears, German regulators have asked its energy utilities to report on their energy needs and prepare plans for a possible cutoff of Russian energy supplies next winter.
  • The more immediate impact from the news is that the threat of one million barrels per day kept off the market has given a significant boost to global oil prices so far today.  Of course, the impact of the war also continues to affect a wide range of other major commodities.

Taiwan:  As Taipei continues to consider the lessons of Russia’s invasion of Ukraine, officials say they may extend compulsory military service beyond the current four months.  Taiwan has been gradually shifting from a conscript military to a volunteer-dominated professional force, but Beijing’s growing pressure against the island it claims as its own, as well as Russia’s invasion of Ukraine, have prompted debate about how to boost civil defense.

United Kingdom:  The February Consumer Price Index was up 6.2% year-over-year, accelerating from the January gain of 5.5% and marking the highest inflation rate since 1992 (see chart immediately below, and the data tables farther down).  The figures illustrate how the current inflation problem is widespread around the world.  The figures also suggest the Bank of England will face pressure to hike interest rates further in the coming months.

United States-United Kingdom:  The U.S. and the U.K. struck a trade accord under which the U.S. will allow the U.K. to ship “historically-based sustainable volumes” of steel and aluminum products to the U.S. without the levies imposed under the former Trump administration, while the U.K. will lift levies on American whiskey, motorcycles, and tobacco.

U.S. Monetary Policy:  Cleveland FRB President Loretta J. Mester yesterday said the Fed would have to raise interest rates many times as it seeks to lower very high levels of inflation.  According to Mester, the benchmark fed funds rate will have to reach 2.5% before the end of this year and even higher in 2023.

• Mester’s year-end target of 2.5% is a bit lower than several other policymakers have suggested, but it still underscores the extent to which the monetary officials are panicked by inflation and are now intent on ratcheting up interest rates aggressively.
• All the same, we continue to suspect their rate hikes will expose financial fragilities and/or an economic slowdown after even a limited number of increases, forcing the Fed to retreat.

Canada:  Prime Minister Trudeau and his center-left Liberal Party struck an agreement in which the leftist New Democratic Party will support his government in key votes until mid-2025.  The deal ensures that the Liberal government, which currently holds only a minority of seats in parliament, will be able to stay in power for at least the next three years.

• Combined, the two parties hold a majority of the seats in parliament.
• Under the agreement, the parties will cooperate in implementing a progressive agenda that focuses on climate change, expanding medical and dental coverage for lower-income Canadians, and delivering more affordable housing.

COVID-19:  Official data show confirmed cases have risen to  474,206,633 worldwide, with 6,099,561 deaths.  In the U.S., confirmed cases rose to 79,803,670, with 973,266 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 217,093,232, equal to 65.4% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 totaled 20,984 yesterday, down 41% from two weeks earlier.  Despite the recent decline in hospitalizations, however, the Omicron mutation’s BA.2 subvariant continues to make gains abroad and is becoming a substantial factor in U.S. infections.  Given BA.2’s greater transmissibility, experts are expecting yet another surge in U.S. cases, hospitalizations, and deaths.
• While multiple studies have found that a fourth vaccine dose offers protection for elderly people and those with health problems, experts have found little evidence to support rolling out a fresh round of jabs more broadly.
• Separately, in a new study, Moderna (MRNA, $186.72) said its vaccine induced robust immune responses in children ages 6 months to 5 years, even though the shot had only modest efficacy against the Omicron variant.  The company said it would seek authorization to use the vaccine for children five years old and younger, one of the last major demographic groups not currently eligible for vaccines.
• Due to Congress’s failure to agree on new pandemic funding, the Biden administration says it has no more money to reimburse hospitals and other healthcare providers for the cost of testing and treating people who lack health insurance.  COVID-19 bills for uninsured patients will now depend on each hospital’s financial-aid policy and their prices, both of which can vary widely from one hospital to another.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

We begin today’s Comment with an update on the Russia-Ukraine war.  We next review a range of international and U.S. developments with the potential to affect the financial markets today.  We wrap up with the latest news on the coronavirus pandemic.

Russia-Ukraine:  The Russian and Ukrainian armed forces appear to remain in a stalemate over most of Ukraine, with both sides failing to gain much territory over the last day.  Russian troops entered the key southeastern port city of Mariupol, but fighting in the streets has apparently been indecisive.  In frustration over its inability to take more territory, the Russians continue to attack civilian areas with artillery, missiles, and aerial bombs.  U.S. officials say this might be a new strategy of wearing down the population so it will accede to Russian control of both Crimea and southeastern Ukraine.  Meanwhile, reports suggest railway workers in Belarus have been cooperating with Ukrainians to cut off railroad links between the countries and thwart Russia’s effort to resupply its troops in Ukraine.  Here in the U.S., yesterday, President Biden warned the nation’s businesses and nongovernmental organizations to immediately “harden” their defenses against potential cyberattacks by the Russian government, citing “evolving intelligence” of such plans by the Kremlin.  The President also warned again that Russia could use chemical weapons within Ukraine.

• As we’ve mentioned previously, Russia’s invasion has prompted European governments to embark on a quick increase in their defense budgets.  However, the renewed commitment to a stronger defense is even broader than that.  EU officials have now drafted a much tougher “Strategic Compass” plan to bolster the bloc’s autonomous defense capability, including a much stronger focus on the threat from Russia and a commitment to bolster its military mobilization and transport capabilities.  EU leaders are expected to endorse the draft plan at their summit later this week.
• Unfortunately, the U.S. and European shipments of vast quantities of weapons to Ukraine could expose the West’s own defense industry limitations.
  • For example, the U.S. has tens of thousands of Stinger anti-aircraft missiles in its inventory; it can continue to send hundreds or thousands at a time to Ukraine.
  • However, the missile is no longer produced in the U.S., and restarting production at the aging U.S. missile production facilities would be difficult.
  • Large shipments of the missile to Ukraine may require drastically bringing forward the Stinger’s replacement from its current date of 2030.
• Ukrainian military officials examining captured Russian vehicles and weapon systems have discovered the extensive use of Western subcomponents, particularly German parts produced in Russian factories contrary to civilian-use-only contracts.  The news has sparked a controversy in Germany and prompted some German companies to stop shipments to Russia and shut down their factories there.
• Separately, support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, representing a significant shift in the continent’s stance toward how to ratchet up economic pressure on Moscow.  Such a ban is still far from certain, but if enacted, it would further ratchet up demand for non-Russian energy and likely drive prices even higher, worsening inflation.  Biden administration officials say Russian oil exports have already dropped by at least 2 million barrels per day because of sanctions and trading bans, depriving the government of a key source of revenue.  The biggest independent oil traders are warning about major diesel shortages in Europe, including the potential for rationing.
  • In other news related to Russian trade, finance, and sanctions, Moscow yesterday made a $66 million interest payment on a dollar bond due in 2029, again skirting default.
  • Russia faces a further $549 million of interest payments on its foreign-currency bonds this month and a $2 billion bond repayment in early April
  • Investors are unsure whether the country will be able to keep up debt payments beyond May 25, when an exemption in U.S. sanctions for interest payments expires.
• In Asia, the Hong Kong-listed shares of Russian aluminum giant Rusal (0486 HK, HKD, 4.03) plunged on Monday after Australia imposed an immediate ban on exporting bauxite and alumina to Russia to punish it for its invasion of Ukraine.  The ban should worsen Russia’s supply shortages further, but it isn’t expected to halt Russian output completely.

Belgium:  As Europe continues working to increase its energy security following the Russian invasion of Ukraine, Belgium’s federal government has postponed its plan to phase out nuclear electricity generation by 2025.  One reactor at both the Doel and Tihange nuclear power plants will have their lives extended by ten years to 2035.  The move further underscores our optimism regarding uranium and other aspects of the nuclear industry.

Japan:  Electric utilities are scrambling to keep the lights on in Tokyo today, as freezing temperatures and power plant outages following a strong earthquake last week put the nation’s capital at risk of blackouts.  The government has warned that households and businesses need to reduce power consumption as much as possible, although it is not yet clear how much that will weigh on overall Japanese economic activity or financial markets.

China:  Heavily indebted real estate development giant Evergrande (3333 HK, HKD, 1.65) said lenders to one of its property services units had seized $2.1 billion in cash pledged as security for third-party guarantees.  The move dealt a blow to international investors, hoping to recoup some of their losses through the subsidiary.  It will also put further downward pressure on Evergrande’s stock and bond values.

U.S. Monetary Policy:  During a moderated discussion after a speech in Washington yesterday, Federal Reserve Chair Powell warned that the central bank was prepared to raise interest rates in half-percentage-point steps and high enough to slow the economy deliberately, if needed, to bring down inflation.  The remarks struck a tougher tone than he used just days earlier in a press conference after the Fed voted to raise its benchmark rate by a quarter point.  In response, stock values fell yesterday, and bond yields have jumped.  Treasury obligations are now suffering through their worst month since late 2016.

• We continue to believe aggressive rate hikes could quickly lead to economic or financial problems, forcing an early Fed retreat.
• All the same, such rapid or extensive rate hikes could push the economy into recession, especially given the current backdrop of high energy prices.  That concern goes far toward explaining the current flattening trend in the yield curve.

U.S. Fiscal Policy:  Some state governments are also taking steps to mitigate the impact of high inflation, especially for energy products.  The steps include mostly short-term suspensions of state gasoline taxes, despite the loss of revenue that will mean for state coffers.

• Maryland and Georgia have already suspended their state gasoline taxes.
• Legislators in Illinois, Massachusetts, Maine, Michigan, Minnesota, New York, and Tennessee are weighing whether to do the same.
• Lawmakers in California are considering giving drivers a $400 rebate to help cushion the blow of high gasoline prices.

U.S. Regulatory Policy:  The SEC has proposed strict requirements for publicly traded companies to report information on greenhouse-gas emissions and risks related to climate change, in one of the Biden administration’s potentially most significant environmental actions to date.  The proposal will be open for public comment for at least two months before the agency begins work on a final rule.

COVID-19:  Official data show confirmed cases have risen to  472,222,374 worldwide, with 6,094,632 deaths.  In the U.S., confirmed cases rose to 79,778,973, with 972,634 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 217,093,232, equal to 65.4% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 rose to 21,679 yesterday, although that was still down 41% from two weeks earlier.
• In a sign of the continued decline of COVID-19 across the U.S., the Defense Department last Wednesday skipped its update of coronavirus case numbers—data it has faithfully published weekly since July 2021.
• Even though China, Hong Kong, and some other Asian countries continue to grapple with their vast new Omicron waves, the situation continues to improve in Japan.  As of today, quasi-emergency measures have ended in all 18 prefectures they had covered, including Tokyo and Osaka, amid a decreasing trend in the number of new infections.  That marks the first time since January 8 that the country has no emergency measures in place.
• A new study found that people who recovered from COVID-19 within the past year are 40% more likely to be diagnosed with diabetes compared to those who weren’t infected.  The increased risk translates into 1% of people who have had COVID-19 developing diabetes who otherwise wouldn’t have, resulting in potentially millions of new cases worldwide.

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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 the Battle of Mariupol is intensifying.  We next review a range of international and U.S. developments with the potential to affect the financial markets today.  We wrap up with the latest news on the coronavirus pandemic.

Russia-Ukraine:  Even though the Russian invasion force has been fought to a standstill in most of Ukraine, it managed to break into the southeastern port city of Mariupol on Saturday.  The Russian military issued an ultimatum for the city’s defenders to surrender by 5:00 am local time today, but Ukraine has rejected it.  The latest reports indicate there is currently fierce urban fighting in the city.  Meanwhile, on the diplomatic front, President Biden will hold a video conference today with the leaders of Germany, France, Italy, and Britain, before attending a NATO summit in Brussels on Wednesday, participating in a European Council summit on Thursday, and traveling to Poland on Friday.

• If the Russians take control of Mariupol, it will probably free up forces that could be used to reinvigorate their attacks elsewhere in Ukraine.  For the time being, however, the intense urban warfare in Mariupol will likely absorb and destroy massive amounts of Russian manpower, weaponry, and morale.
• The Russian invasion force continues to suffer immense casualties, including high-ranking officers.  The deputy commander of Russia’s Black Sea Fleet was killed near Mariupol over the weekend, bringing the number of top-ranking officers killed in action in Ukraine to at least six.
• Other reports indicate the Russians have forcibly deported thousands of Ukrainians from Mariupol to “filtration camps” in Russia and sent them elsewhere to work as slave laborers.
• As we’ve been warning, skyrocketing grain prices because of the war have created food shortages and higher food prices in poorer countries, particularly in the Middle East.  Fertilizer prices are also soaring (see chart below).
• One of the most potentially divisive issues at the meetings will be a Polish proposal to organize an international peacekeeping mission for Ukraine. While NATO has carried out such missions in Europe before, those were done after fighting eased.  President Biden has insisted that he won’t send U.S. troops into Ukraine because such a move would risk an all-out war between the U.S. and Russia.  However, increasing evidence of the Russian military’s weakness and poor operating capability could lead to more calls for intervention from those who advocate for such a move.  The Russian military’s continued poor performance also has the potential to push President Putin toward further escalation, perhaps to the point of using chemical or nuclear weapons in Ukraine.
  • Global investors appear to have become sanguine about the war in Ukraine in recent days, allowing financial markets to stabilize and even rebound.
  • However, it’s important to remember that military, economic, and financial risks still abound.

Germany-Qatar:  In a visit to Doha yesterday, German Economy Minister Robert Habeck reached an agreement with the Qatari government on a long-term natural gas supply deal to reduce Germany’s reliance on Russian gas in the wake of the Ukraine war.

United Kingdom:  In what could be another major move toward European energy security, Prime Minister Johnson will lay out a plan to boost Britain’s nuclear energy capacity by as much as fivefold by 2050.  The plan would imply the construction of at least half a dozen big new stations over the next 25 years.  Coupled with other European countries’ new focus on energy independence, Johnson’s plan underscores our optimism toward uranium and other aspects of the nuclear industry.

China:  The Hong Kong stock market has suspended trading in the shares of highly indebted property developer Evergrande (3333 HK, HKD,  1.65), pending a release of information from the company that could shed light on its restructuring and the fate of international investors.

U.S. Monetary Policy:  After dissenting to the Fed’s decision last week to hike its benchmark interest-rate target by 0.25%, in favor of a larger hike of 0.50%, St. Louis FRB President Bullard said on Friday that the Fed should boost rates all the way to 3.00% this year to avoid losing credibility regarding its commitment to fighting inflation.  In contrast, the Fed policymakers’ economic projects released at last week’s meeting called for hiking the benchmark rate to about 1.90% by the end of 2022.

• Bullard’s statement underscores the extent to which some Fed policymakers want to raise interest rates to combat inflation.
• As we’ve noted before, however, we suspect that slowing economic growth and financial fragilities will keep the Fed from hiking rates more than a few times this year.

United States-Saudi Arabia:  In an apparent effort by President Biden to spur cooperation in bringing down energy prices, his administration has transferred a significant number of Patriot antimissile interceptors to Saudi Arabia, fulfilling Riyadh’s urgent request for resupply to fend off drone and missile attacks by Iran-backed Houthi rebels in neighboring Yemen.

U.S. Energy Industry:  Amid high energy prices sparked by rebounding demand and supply concerns related to the Russia-Ukraine war, the number of active U.S. oil rigs has grown by roughly one-fifth in the past six months.  However, much of the new activity is to make up for a depleted inventory of wells drilled before the pandemic and isn’t expected to increase overall output enough to bring down prices significantly.

U.S. Ports:  As we’ve been warning, the tight labor market and this summer’s expiration of the West Coast longshoremen’s labor contract raises the prospect of a strike that would further disrupt supply chains and boost inflation.  To avoid the potential disruptions, some shippers are reportedly pulling forward their holiday-season orders to get them into domestic networks early, and many are diverting cargo that normally moves through the West Coast to East Coast and Gulf Coast ports.

Global Semiconductor Industry:  Even as the Fed and other central banks try to bring down inflation, the Russia-Ukraine war and other supply shocks promise to keep prices high.  The latest bad news on that front comes from ASML (ASML, USD, 679.86), the Dutch maker of lithography machines needed to produce the most advanced chips.  According to CEO Peter Wennink, it will be another two years before the company can produce all the chipmaking machines required by semiconductor firms to meet their customers’ demands.

COVID-19:  Official data show confirmed cases have risen to  470,852,725 worldwide, with 6,078,361 deaths.  In the U.S., confirmed cases rose to 79,734,867, with 971,162 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 217,060,180, equal to 65.4% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 16,465 yesterday, down 57% from two weeks earlier.
• Over the weekend, amid the continuing surge of Omicron infections, mainland China announced its first coronavirus deaths in more than a year.
• Starting April 1, Hong Kong will significantly ease some of its draconian pandemic lockdown and quarantine measures, which have dramatically slowed the economy and prompted many residents to leave the city.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report begins with the latest updates on the Russian invasion of Ukraine. We then give a brief roundup of international news items and conclude with COVID-19 coverage.

The conflict in Ukraine shows no signs of abating. On Thursday, Reuters news agency reported that there has been very little progress made in peace talks. The two sides are working on an agreement that would allow Ukraine to remain neutral while keeping its military. However, there are rumors that Russia is also pushing Ukraine to formally cede territory in eastern Ukraine. Zelensky has stated that he is willing to accept Russia’s neutrality demand but is unwilling to give up any parts of the country.  The two sides are still far apart, and fighting will likely continue. That being said, there are growing concerns that Putin is considering using nuclear weapons to end the war, an action that may come with its own risk. Eight years ago, Chinese President Xi Jinping signed a pledge to protect Ukraine in the event of a nuclear attack. Consequently, Russia risks a response from China if it does use its nuclear weapons in Ukraine. Although we think a military response from China is highly doubtful, we suspect Beijing will be forced to take some kind of action to maintain its credibility and willingness to honor its commitment to other countries. A non-military response from China could come in the form of a reduction in sanction relief. As a result, we suspect China may offer military support to Russia to dissuade Putin from using nuclear weapons.

Reports yesterday showed that the Biden administration is becoming confident that China will grant Russia military support in its efforts to invade Ukraine. Publicly, China has advocated that it would like to see a peaceful solution to the Ukraine crisis and has maintained that it is not taking sides in the dispute. This position is becoming less tenable by the day as Russian atrocities continue to mount. If China provides Russia with support, the U.S. will likely respond with sanctions. Given that China holds much of its reserves in dollars, sanctions could be very detrimental to its economy. That does not mean China will be deterred from helping Russia. A primary concern for China is that the collapse of Russia will make it easier for the West to form a blockade around it. The development of the AUKUS alliance formed in September of last year further adds to Chinese fears of a blockade. China may want to protect Russia simply to keep the West off its back. From a market standpoint, the situation represents another fat tail event that can potentially be detrimental to equities but may be favorable to U.S. treasuries.

Other Ukraine news

• Going into the fourth week of the conflict, the Russian military has not been able to take over a major city, although Russian troops are making progress in Mariupol. Meanwhile, House Speaker Nancy Pelosi (CA-D) ruled out the possibility of having NATO or U.S. forces create a no-fly zone over Ukraine. In a bid of support, Slovakia has stated it was willing to send long-range surface-to-air missiles to Ukraine immediately, provided that Western allies give them a replacement.
• Russia’s troubles are growing. On Wednesday, Russian officials stated there has been an unprecedented number of cyberattacks on government websites. In other news, rating agency S&P (SPGI, $402.66) has downgraded the rating for Russian bonds to junk due to concerns that the debt is “highly vulnerable to nonpayment.”
• On Thursday, the House passed legislation that would end normal trade ties with Russia and Belarus. If passed in the Senate, the bill will impose tariffs on Russian and Belarus imports.

Non-Ukraine related news

• The United Kingdom plans to take steps to suspend parts of the post-Brexit deal for Northern Ireland. The decision is not final and will likely not lead to an immediate suspension of the agreement. The move may lead to a complete severing of ties between the U.K. and EU.
• France is considering nationalizing assets from the nuclear electric power generation company Électricité de France (ECIFY, $2.06) as the country seeks to become energy independent. The country is also looking to boost the construction of atomic plants and renewable energy sources.
• The International Energy Agency has advocated for countries to reduce crude prices by restricting cars. In its proposal, it argued that if countries could lower speed limits and promote the usage of public transportation, they could reduce oil demand by 2.7 million barrels within four months.

COVID-19: The number of reported cases is 463,964,928, with 6,059,216 fatalities.  In the U.S., there are 79,631,708 confirmed cases with 968,329 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 696,801,055 doses of the vaccine have been distributed, with 557,644,629 doses injected. The number receiving at least one dose is 254,750,626, while the number of second doses is 216,829,829, and the number of the third dose, granting the highest level of immunity, is 96,232,774. The FT has a page on global vaccine distribution.

• Canada plans to lift COVID-19 testing requirements for fully vaccinated travelers. Although some vaccinated travelers may be randomly selected to take a molecular test, they will not be required to quarantine. Meanwhile, Germany plans to let virus restrictions expire, even as case numbers rise.
• South Korea reported a new peak in COVID-19 cases on Thursday. The country is facing its strongest wave of the virus since the start of the pandemic in 2020.
• Chief Medical Advisor to the President, Anthony Fauci, warned that without additional funding, the country may be vulnerable to another surge in COVID-19 cases. While cases have fallen in the U.S., the funding used to combat other waves is running out. Fauci does not predict another surge in infections, but he suspects we might see an increase in cases in the coming weeks.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! The report today begins with Zelensky’s speeches to Congress and the Bundestag. We then give a brief overview of Wednesday’s Fed meeting and the impact it may have on financial markets. Next, we focus on energy and China-related news and conclude with an update on the coronavirus pandemic.

Ukraine-Russia news: In a speech to Congress, Ukrainian President Volodymyr Zelensky pushed lawmakers to do more to defend his country against the Russian invasion. Although he would like the U.S. to enforce a no-fly zone over Ukraine, he said his country would accept a surface-to-air missile system as an alternative. Following Zelensky’s speech to Congress, the Biden administration is considering sending Switchblade drones to Ukraine. In a separate speech to the Bundestag, Zelensky accused Germany of prioritizing its economic relationship with Russia over the security of Europe. The comment comes as Zelensky pushes Europe to apply more pressure on Moscow by banning the imports of Russian oil. Zelensky’s warm welcome in the West has worried Russian officials, as Moscow believes it is losing the information war. In a way to drum up domestic support, Putin accused the West of hurting Russian citizens with sanctions and accused the U.S. of promoting Russophobia to bring the country to its knees.

In light of the sanctions, the Russian government appears to be willing to honor its debt commitments. On Wednesday, the Kremlin announced it fulfilled its $117 million interest payment for two Eurobonds. It also permitted Severstal, a Russian steel and mining company, to make a $12.6 million interest payment but warned that Citi may block the deal. Sanctions have made it difficult for Russian firms to secure the dollars needed to repay debt and avoid defaults. Russian fertilizer company EuroChem may have already missed a debt payment. The sanctions have forced the Russian government to impose new restrictions on foreigners trading Russian assets. Without access to the dollar, the longer these sanctions remain in place, the more likely it is that Russian firms will miss a debt payment.

Fed reaction: The Federal Reserve raised rates by 25 bps on Wednesday and signaled that it could raise rates six additional times this year. St. Louis Fed President James Bullard dissented because he favored a 50bps rate hike. The Fed statement showed that the FOMC believes the economy and the labor markets are strong. Additionally, the statement mentioned that Russia’s invasion of Ukraine would likely put upward pressure on inflation and weigh on economic activity. As a result, the Federal Reserve updated its inflation forecast for 2022 from 2.6% to 4.3% and downgraded its median GDP growth projections from 4.0% to 2.8%. Considering the situation in Ukraine, the Fed signaled it was still keen on raising rates and reducing the size of its balance sheet at the next meeting. The chart below shows the updated Fed’s dot plot. The new dot plot shows the terminal Fed Funds rate will be 1.9% for 2022.

Although financial markets responded negatively to the Fed statement, they recovered slightly following Federal Reserve Chair Jerome Powell’s press conference. During the Q&A, Powell hinted the Fed could potentially view quantitative tightening as a substitute for a rate hike. The comment likely signaled that rate hikes might not exceed 25 bps in future meetings. Our view is that the Fed is correct in its decision to raise rates; however, we suspect that given the level of debt, the Fed runs the risk of causing a financial crisis if it follows through on its plan to hike rates six times this year. As a result, we suspect the Fed may take its foot off the gas if it sees signs of a market turmoil.

Other Fed news: The renomination and nomination of Fed Chair Powell and Fed Governor Lael Brainard were approved by the Senate Banking Committee on Wednesday. In addition, the committee advanced two economists, Lisa Cook and Philip Jefferson, in their bid to fill two vacant Fed governor seats.

Energy news: The U.S. Department of Energy has approved more exports of liquified natural gas. The move is designed to help Europe wean itself off of Russian gas. Although this may not be the ultimate solution, this will likely ease some of the burdens of the switch.  In other news, President Biden urged oil companies to start lowering the price of gas following the recent decline in crude prices.

China news: The People’s Bank of China will take steps to boost its equity market after pledging to calm market concerns and stimulate the economy. There is growing speculation that the central bank will try to cut rates or lower the reserve requirement to meet this pledge.  In addition, monetary easing government officials signaled that their regulatory crackdown could end soon. The developments have had a positive impact on financial markets today.

Other market news: In line with the Federal Reserve, the Bank of England and the Bank of Taiwan raised their benchmark interest rates by 25 bps. The central banks of Hungary, Indonesia, and Turkey held interest rates steady.

COVID-19: The number of reported cases is 463,964,928, with 6,059,216 fatalities.  In the U.S., there are 79,631,708 confirmed cases, with 968,329 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 696,801,055 doses of the vaccine have been distributed with 557,644,629 doses injected.  The number receiving at least one dose is 254,750,626, while the number of second doses is 216,829,829, and the number of the third dose, granting the highest level of immunity, is 96,232,774. The FT has a page on global vaccine distribution.

• In China, factories in Shenzhen were allowed to resume production after the city was placed in lockdown three days prior. The move was designed to protect the economy and supply chains from the impact of the new wave of Omicron cases.
• Irish Prime Minister Michael Martin tested positive for COVID-19 while in D.C.
• The Biden administration has expressed concern that the reduction in COVID-era policies will lead to an increase in mass immigration. Since the start of the pandemic, the government has been using Title 42 as a way to expel migrants. However, it expects to end this program following the decline in the number of coronavirus cases.

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