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.  There are hints of compromise on each side, even as the Ukrainians are apparently launching a major counterattack.  That alone would probably be enough to give a boost to global stock markets, but we also note the Chinese government has said it will take steps to boost its private businesses.  Together, the developments are driving stocks sharply higher so far today.  Beyond those stories, we also review a range of other international and U.S. news stories that have the potential to affect financial markets today.  We wrap up with the latest news on the coronavirus pandemic.

Russia-Ukraine:  As of this writing, there still appears to be little change in the military situation in Ukraine.  Russian forces continue trying to encircle key cities such as the capital Kyiv, but Ukrainian forces continue to thwart them.  In response, the Russian military continues to attack civilian targets with missiles, long-range artillery, and aerial bombing.  The major development is that Ukrainian forces are reportedly launching a counterattack against the Russians around Kyiv and other cities.  If true, it would likely be a wise move given that the Russians are now in a vulnerable position, having stalled out and needing to regroup, even as their supply lines are dangerously extended.

• Despite the continuing military operations, Russian and Ukrainian officials are still discussing a way out of the conflict.  Importantly, both sides have made more conciliatory statements over the last day.  For example, Russian Foreign Minister Lavrov signaled Moscow might be satisfied if Ukraine had its own military but was neutral.  Ukrainian President Zelensky said the talks were beginning to “sound more realistic.”  In a video conference with European leaders in London, Zelensky also said that he accepted Ukraine would not be admitted to NATO.
  • Coupled with signs that Beijing will take steps to support its private businesses, the hints of a diplomatic breakthrough in Ukraine have helped spark a major rally for equities around the world so far today.  In contrast, safe-haven assets such as government bonds, precious metals, oil, and gas are all in retreat.
  • Like anyone else, we are hopeful that the Russia-Ukraine conflict can end soon, and that durable peace can be established, but we would caution that nothing is set in stone yet.  In particular, the Russian side could be playing for time while it continues to regroup and resupply its forces to prepare for a push into Ukraine’s major cities.  We think it’s still too early to break out the champagne.
• Separately, Russia is due to pay $117 million in interest on two dollar-denominated foreign bonds today.  President Putin has suggested paying the interest in rubles, but the major bond-rating companies say that would constitute a default.  If the payment is made in dollars, and within the 30-day grace period that starts today, it would probably signal that Russia is on the road to compromise and is trying to clear a path back into the good graces of its previous economic partners.
  • More broadly, the war also threatens further supply-chain disruptions across multiple industries.  For example, the conflict has idled some Western European auto plants because they can’t get critical cable harnesses made in Ukraine.
  • By exacerbating the current shortage of autos, that could further boost prices for new and used vehicles and help keep central banks thinking about interest-rate hikes.
• Meanwhile, the U.S. and its NATO allies continue to show a united front as they seek to counter Russia’s aggression.  The White House said President Biden plans to go to Brussels on March 24 for meetings with the other NATO leaders.  They will discuss how to intensify pressure on Moscow without sparking a direct military conflict with Russia.
• Yesterday, President Biden signed the just-passed government spending bill that includes $13.6 billion in security, humanitarian, and economic aid for Ukraine. As early as today, Biden is expected to announce about $800 million in new military assistance to Ukraine to be funded from the new bill.  The announcement will follow President Zelensky’s video speech to a joint session of Congress this morning, in which he is expected to plead for more assistance to help Ukraine push out the Russians.

Global Nickel Market:   The London Metal Exchange today was forced to suspend electronic trading in nickel just moments after the market reopened for business following a week-long shutdown partly related to the Russia-Ukraine war.  Even though the exchange had imposed a new 5% limit-down, prices tumbled so rapidly at the open that some trades happened below that level, forcing the exchange to stop trading and launch an investigation.

• The exchange said it would allow in-person trading later in the day.
• Nevertheless, the fiasco is another black eye for the LME and will likely undermine some traders’ confidence in using the market.  If enough traders try to exit the market, it could spark increased price volatility for several commodities in the near term.

Iran Nuclear Deal:  Russia has apparently walked back recent demands that Washington should offer broad sanction exemptions related to the Iran nuclear deal.  It now appears Russia has settled for language ensuring that the U.S. will not sanction Russian participation in nuclear projects that are part of returning the agreement to its full implementation.

• It now looks as if the way is clear for Tehran and Washington to revive the 2015 deal.
• If the agreement is revived, Iranian oil could return to the global marketplace and help push prices down, even beyond their recent drop, which helped drive yesterday’s strong rally in global equity prices.

China:  At a special meeting of the State Council’s Financial Stability and Development Committee today, top economic advisor Liu He said Beijing would take measures to support the economy and financial markets after a sharp sell-off stemming from the government’s crackdown on private businesses, “zero-COVID” strategy, and risky support for Russia in its invasion of Ukraine.

• According to Liu, the government will take steps to boost the economy in the first quarter and introduce “policies that are favorable to the market,” although he didn’t elaborate on what specific measures would be taken.
• In any case, investors are cheering the show of support.  The announcement is a major reason for the jump in global equity markets so far today, even if there are still no details on the support to be given.

China-Saudi Arabia:  Reports yesterday said Beijing and Riyadh have recently accelerated their six-year-old talks on pricing some Saudi oil exports to China in renminbi instead of dollars.  The intensifying talks will probably spark renewed concern about the dollar’s status as the world’s primary reserve currency, especially after the U.S. actions to essentially freeze a huge share of Russia’s dollar-based foreign reserves.

• However, even though the Saudis and the Chinese both have reasons to step away from the dollar, such a move would be costly for the Saudis.
• Therefore, it’s not entirely clear the Saudis would sell a significant portion of their oil for the Chinese currency.

U.S. Monetary Policy:  Top officials at the Federal Reserve will finish their latest monetary policy meeting today.  Last month, Chair Powell signaled the officials would use the meeting to boost the benchmark fed funds interest rate by 0.25%.  The increase is expected to be just the first in a series of rate hikes.  Powell has hinted that a series of shocks, including the Russian invasion, could keep inflation uncomfortably high and potentially call for larger rate rises this summer.  The officials today will also release their latest economic projections, which will likely show they expect a long series of rate hikes.  Nevertheless, we continue to believe that financial fragilities and/or an economic slowdown will probably limit how far the Fed can really go.

• Separately, President Biden’s nominee to serve as the Feb’s vice chair for regulation, Sarah Bloom Raskin, withdrew her candidacy after Democratic Senator Joe Manchin of West Virginia said he wouldn’t support her.  As we reported here yesterday, Manchin opposed Raskin because of her past calls for regulations that would limit funding to companies that produce fossil fuels.
• The failed Raskin nomination highlights the bind Biden has gotten himself into by trying to please the Democratic party’s more progressive wing.  As he tries to come up with an alternative to Raskin, a major question is whether he will again try to find someone to satisfy that wing with little or no Republican help or whether he will tap someone centrist enough to garner some Republican support.

COVID-19:  Official data show confirmed cases have risen to  461,817,791 worldwide, with 6,052,539 deaths.  In the U.S., confirmed cases rose to 79,587,004, with 966,470 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 considered fully vaccinated now totals 216,767,955, equal to 65.3% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 26,436 yesterday, down 44% from two weeks earlier.
• Days after Congress rejected a $15 billion appropriation for the pandemic, the Biden administration has warned that the federal government is running out of money to pay for vaccines, tests, and treatments, leaving it unprepared for any future rise in cases.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment opens with an update on the Russia-Ukraine War, where there has been little discernible change in the military situation on the ground or in diplomatic efforts to end the conflict.  We next review some 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:  There was little change in the military situation in Ukraine yesterday.  Russian forces continue trying to encircle key cities such as the capital Kyiv, but Ukrainian forces continue to thwart them.  In response, the Russian military continues to attack civilian targets with missiles, long-range artillery, and aerial bombing.  In one of the more concerning military developments, Ukraine’s military said it had detected a Russian surveillance drone crossing the border into neighboring Poland, a NATO member, but it shot the drone down after it crossed back into Ukraine’s airspace.  Meanwhile, Russian and Ukrainian officials held a video conference to discuss a ceasefire, but it adjourned until today with no discernible progress.  Israeli Prime Minister Bennett spoke separately with Russian President Putin and Ukrainian President Zelensky in an effort to find a compromise, but those talks also produced no results.  Finally, the prime ministers of the Czech Republic, Poland, and Slovenia will travel to Kyiv today in a show of support for Ukraine.

• Meanwhile, U.S. National Security Advisor Sullivan and China’s top foreign affairs official, Yang Jiechi, met in Rome yesterday to discuss the situation.  No details on the meeting were released other than a U.S. official’s comment, “We do have deep concerns about China’s alignment with Russia at this time, and the national security adviser was direct about those concerns and the potential implications and consequences of certain actions.”
  • Without a doubt, Sullivan would have warned Yang that if China gave more support to Russia, especially the military assistance it has signaled it is open to, the U.S. and its European allies would impose economic punishments that would further impede trade and investment with the Chinese.
  • In other words, the meeting illustrates our prediction that the Russia-Ukraine war will further cleave the world into two or more economic blocs linked by only limited trade and investment ties.
    • As a sign of China’s frustration with the situation, Foreign Minister Wang Yi today complained in a meeting with his Spanish counterpart that China is not a party to the war and should be spared any impact from the West’s sanctions against Russia.  He also warned that “China has a right to safeguard its legitimate rights and interests.”
    • In another negative sign, Beijing has blocked access to a U.S. website where a high-level Chinese researcher published an article urging Chinese leaders to disassociate from Russia and make amends with the West.  We had taken that article as a potential sign that China was getting cold feet over its support for Russia.  We still think the Chinese leadership is struggling to decide on their best course, but for now, the balance of power may be with those leaders who want to continue supporting Russia.
    • Coupled with China’s new coronavirus outbreak and signs that Beijing is continuing its regulatory crackdown, the prospect that China will be collateral damage in the war has fed into a further sharp drop of almost 5% in Chinese stocks so far today.
• Even as the Chinese economy looks increasingly at risk because of the war, European countries continue to tighten the screws on Russia.  European Union member states have formally approved a fourth package of sanctions against Russia.
  • The new sanctions include freezing the assets of several oligarchs, imposing an import ban on Russian steel and iron, imposing an export ban on luxury goods worth more than €300 and cars costing more than €50,000, and outlawing investments in Russian energy companies.
  • Russia is due to make two interest payments on its dollar bonds on Wednesday, but because of the Western sanctions to date, it is unclear whether investors will actually receive their cash.  Russian debt continues to trade at distressed prices as investors consider the potential for a uniquely messy government debt default.
• Congressional leaders announced that President Zelensky will make a video address to a joint session of the Senate and House of Representatives on Wednesday.  In the address, to be subsequently released to the public, Zelensky is expected to press for more military assistance to help push the Russians out of his country.

Global Nickel Market:  The London Metal Exchange said the buying and selling of nickel would resume on Wednesday after it suspended the market for six trading sessions following an unprecedented price surge in part related to the Russia-Ukraine war.  The exchange also unveiled rules meant to rein in nickel-price moves and protect its members, after a Chinese metals giant racked up billions of dollars in losses from wrong-way bets.

Germany:  As we have already noted, one major result of the Russia-Ukraine war is that many European countries have signaled they will finally boost their military budgets after years of underinvestment in defense.  Germany has shown the most dramatic about-face with a landmark decision to inject €100 billion into the country’s armed forces.

• In the first major defense deal under the new armaments program, Defense Minister Lambrecht said yesterday that Germany would purchase U.S.-made F-35 fighter jets capable of carrying nuclear weapons.  It will also upgrade its Eurofighter Typhoon jets for electronic warfare.
• With defense officials in Berlin scrambling to identify spending opportunities that promise fast results, the government is reportedly considering the suspension of onerous contracting rules.  The prospect is pushing German defense firms to jockey for position in what they see as an impending feeding frenzy.
• In late March, we will issue a new Bi-Weekly Geopolitical Report outlining the prospects and investment implications of higher defense spending in the NATO countries.

Turkey:  The ruling alliance has unveiled a plan to amend the country’s electoral laws in a way that could damage the opposition’s efforts to wrest control of parliament from President Erdogan’s party.  If Erdogan is able to further entrench his political position, prospects for economic orthodoxy and healthier economic performance would dim.

Saudi Arabia:  Hon Hai Precision Industry (HNHPF, $6.89), the top manufacturer of iPhones, otherwise known as Foxconn, said it is in talks with Saudi Arabia about jointly building a $9 billion multipurpose facility that could make microchips, electric-vehicle components, and other electronics like displays.  The facility would be located in Neom, a tech-focused city-state that the kingdom is developing in the desert.

• Besides Saudi Arabia, the company is also talking with the United Arab Emirates about potentially siting the project there.
• At one level, the talks underscore Foxconn’s efforts to diversify its manufacturing and locate more activity outside Taiwan and China.  Just as important, the talks illustrate the extent to which Saudi Arabia and the UAE are attempting to diversify their economies away from petroleum and develop their own cutting-edge manufacturing capabilities.  The UAE is already an up-and-coming center for high-tech military goods.  If successful, these efforts could potentially transform the Middle Eastern economy and make its financial markets more attractive for foreign investors.

U.S. Monetary Policy:  Monetary policymakers at the Federal Reserve will begin their latest two-day meeting today.  Last month, Chair Powell signaled the officials would use the meeting to hike the benchmark fed funds interest rate by 0.25%.  However, the hike is expected to be just the first in a series of interest-rate increases.  Powell has hinted that a series of shocks, including the Russian invasion, could keep inflation uncomfortably high and potentially call for larger rate rises this summer.  We continue to believe financial fragilities and/or an economic slowdown will probably limit how far the Fed will actually increase rates.

• Separately, Democratic Senator Joe Manchin of West Virginia said he wouldn’t support President Biden’s nomination of Sarah Bloom Raskin to serve as the Feb’s vice chair for regulation, citing her past calls for regulations that would limit funding to companies that produce fossil fuels.
• Since the Senate is split evenly between Democrats and Republicans, and since no Republican seems likely to support Bloom Raskin, the decision by Manchin will probably doom her nomination and force President Biden to come up with a replacement.

COVID-19:  Official data show confirmed cases have risen to  459,927,299 worldwide, with 6,046,747 deaths.  In the U.S., confirmed cases rose to 79,562,369, with 965,106 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 considered fully vaccinated now totals 216,690,804, equal to 65.3% of the total population.

 In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 27,901 yesterday, down 43% from two weeks earlier.

• Even though new cases, hospitalizations, and deaths are falling in the U.S., several European countries are suffering from a new wave.  Many factors are likely at play, including relaxed mitigation measures, the spread of the B.A.2 variant, and waning vaccine protection.
  • The new wave in Europe raises the possibility that the U.S. could also see a renewed uptick.
  • However, because of factors ranging from new treatment options to social pushback against restrictions, we suspect any new wave would have a much less economic and financial impact than previous waves.
• Meanwhile, China and Hong Kong continue to face skyrocketing infections in their latest wave, with the government imposing strict social distancing rules and locking down an increasing portion of the economy.
  • Investors are increasingly concerned that the new lockdowns will slow the Chinese economy, producing significant headwinds for global economic activity.
  • Reflecting that, oil prices today have again slid below $100 per barrel, despite the ongoing Russia-Ukraine war and massive sanctions on the oil-dependent Russian economy.

View PDF

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.  Concerns about a Russian missile strike close to NATO member Poland are being partially offset by positive signs for a diplomatic compromise.  We next review a range of U.S. and international developments that could affect the financial markets today.  We close with the latest news on the coronavirus pandemic.

Russia-Ukraine:  Even as Russian forces continue regrouping for an expected new assault on the capital city of Kyiv, the key development over the weekend was a large Russian missile strike on a Ukrainian military training base just 10 miles from the Polish border.  Illustrating the risk of escalation in the conflict, the U.S. responded with a stern warning that NATO would respond to even the slightest attack on any of its territory.  In fact, even before the missile attack, Russian Deputy Foreign Minister Ryabkov warned that NATO’s arms shipments to Ukraine would be considered a valid target.

• At the same time, diplomatic efforts to end the conflict continue.  In a long phone call Saturday, German Chancellor Scholz and French President Macron tried to persuade Russian President Putin to agree to an immediate ceasefire and seek a negotiated solution, but to no avail.
• On a more positive note, the lower-level Russian and Ukrainian officials who have met several times to discuss a ceasefire have begun to sound more conciliatory.  Ukrainian negotiator and presidential adviser Mykhailo Podolyak said in a video posted online, “I think that we will achieve some results literally in a matter of days,” and the RIA news agency quoted a Russian delegate, Leonid Slutsky, saying the latest talks had made substantial progress.
  • Neither side indicated what scope any near-term agreement might have.  However, Ukrainian President Zelensky today said the negotiators are discussing a possible meeting between him and Putin.
  • Separately, U.S. Deputy Secretary of State Wendy Sherman said Russia showed signs of willingness to engage in substantive negotiations about ending.
  • The Russian and Ukrainian delegates are due to have another round of talks today, but this time by video conference.
• Perhaps even more important, we are seeing signs that the Chinese leadership has recognized the danger it’s in by aligning too closely with Russia.  For example, a high-level Chinese foreign policy researcher has been allowed to publish an analysis arguing that President Putin is bound to lose the war, which will strengthen the U.S. and the Western liberal democracies that, in China’s view, had been in decline.  The researcher argues that China, therefore, must cut its ties to Putin and help bring about a negotiated settlement so it won’t be isolated from the newly strengthened West in the future.
  • Amid reports Russia has asked China for military equipment and other assistance in its war against Ukraine, U.S. National Security Advisor Sullivan will discuss the situation today in Rome with top Chinese foreign affairs official Yang Jiechi.
  • Sullivan is expected to warn China against trying to bail out Russia and impress upon Yang the reputational damage China is suffering by standing by Russia.
• We continue to see a high risk that the war could broaden and escalate.  Without a doubt, the economic and financial repercussions already set in motion will continue, from skyrocketing prices for energy and other commodities to a long-term risk that the U.S. dollar might lose its attractiveness as a global reserve currency (although it’s important to note that some countries, including major commodity suppliers like Canada and Australia, are benefitting).  Those factors point to a high possibility of a near-term recession or stagflation, consistent with the market action we’ve recently seen in equities, bonds, commodities, and currencies to date.
  • All the same, the reinvigoration of the U.S. and NATO plus the rising geopolitical costs for Russia and China (not to mention the horrible direct costs for Ukraine) suggests that a sudden, unexpected diplomatic breakthrough can’t be dismissed out of hand.
  • In particular, if China’s leaders change their minds about supporting Russia and pivot toward active peacemaking, there may be some chance for a quicker and more positive end to the war than now seems possible.  It’s still too early to predict such an outcome, but investors should keep in mind that it is a possibility.  Indeed, the relatively more optimistic comments coming from the Russian and Ukrainian negotiators have already given a modest boost to stock markets today and are helping push down oil prices.

United States-Venezuela:  Faced with a massive political backlash, the Biden administration has backed off its outreach to Venezuela for additional oil supplies that could help bring down fuel prices.  For now, it suggests Venezuela will remain isolated internationally and will have little ability to rejuvenate its oil industry or its oil exports to the U.S.

United States-Iran:  The U.S. has turned down a Russian demand for sanctions relief before it would help push a revived Iran nuclear deal over the goal line.  For at least the time being, that has put a pause on the deal, keeping Iranian crude oil largely unavailable to world markets and helping keep energy prices high.

Taiwan:  For the second time this year and the seventh time since the start of 2020, the island’s military said one of its jet fighters has crashed into the sea.  The pilot, who ejected and was rescued, said a mechanical problem brought the plane down.

• The incident buttresses concern about the high operating tempos forced on the Taiwanese air force as it responds to Chinese planes’ frequent challenges to the island’s airspace.
• The Chinese intrusions into Taiwan’s aircraft identification zone probably aim in part to wear down the island’s military forces and probe for its weaknesses.  If successful, those intrusions could eventually encourage China to try to take control of Taiwan, likely setting off a major international crisis that would drive asset prices lower.

Colombia:  As anticipated, ex-Marxist guerilla Gustavo Petro won yesterday’s left-wing primary election, confirming he is the man to beat in the May 29 presidential vote.  In addition, Petro’s coalition did well in legislative elections and will be one of the biggest blocs in the next parliament.

• Petro’s performance confirms that political winds in Latin America continue to blow to the left, threatening the region’s free-market, private-property-oriented economic policies.
• The continued leftward trend threatens to undermine Latin American asset values going forward.

United States:  With apartment rents rising rapidly, legislators across the U.S. are again looking to enact rent control, reviving measures largely shunned in recent years.  These proposals, which would generally allow landlords to boost monthly rents by no more than 2% to 10%, are on the legislative agenda in more than a dozen states.

COVID-19:  Official data show confirmed cases have risen to  456,908,767 worldwide, with 6,041,077 deaths.  In the U.S., confirmed cases rose to 79,517,492, with 967,552 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 considered fully vaccinated now totals 216,647,869, equal to 65.3% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 29,177 yesterday, down 43% from two weeks earlier.
• In China, new locally transmitted cases tripled to more than 3,100 over the weekend, marking the country’s worst outbreak in two years.  In response, authorities in the southern metropolis of Shenzhen imposed a new set of restrictions.  For example, bus and subway services will be suspended beginning on Monday, and residents will be urged to work from home and step out only to buy daily necessities.
  • Just as important, the Shenzhen shutdown will force a number of manufacturing facilities to shut down for a week or more.
  • Since that portends potentially broader negative effects for the Chinese economy, the news contributes to today’s downdraft in energy prices.  The burgeoning infection rates are also driving Chinese equities down sharply today.
• Outside the mainland, Hong Kong is facing even greater infections, in large part because many of its elderly residents still aren’t vaccinated.  The city’s death toll per million people has now surpassed that of the worst-hit European countries and all of its main peers in the Asia-Pacific region (see graph below).

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with the latest developments in the Ukraine war, including an update on the economic fallout from the Russian invasion. We next discuss several news stories not related to the Ukraine crisis and conclude with our pandemic coverage.

The war in Ukraine continues unabated, but talks between Russia and Ukraine are progressing. Discussions between Russian and Ukrainian officials in Turkey did not end with a solution, but Russian President Vladimir Putin stated that there has been a positive shift in talks. On Wednesday, Ukraine President Volodymyr Zelensky stated he was open to making his country a neutral state. However, Russian officials appear to want additional concessions. In Europe, EU leaders rebuffed calls from Ukraine for fast-track membership but did pledge closer ties with the country. The move comes as Ukraine seeks reassurances from the West to have support after the Ukraine crisis ends. Although the EU sympathizes with Ukraine, it will likely struggle to find universal support for its admission, especially with Hungary, a Russian ally, as a member. In the U.S., the White House warned Russia could use chemical or biological weapons on Ukraine, perhaps as justification to use chemical weapons itself. On Thursday, a Russian official, without evidence, stated the U.S. funded research into bat coronaviruses. The U.S. quickly dismissed the allegation, but the narrative has garnered traction in Chinese and Russian media outlets. That being said, the accusation may explain why Russian officials have targeted nuclear facilities in its attacks. We suspect the Russians may be using these areas to establish the narrative that Ukraine was developing nuclear weapons, making the invasion necessary. As the war wages on, the likelihood of escalation remains elevated, and we continue to believe that as bad as things are now in Ukraine, there is considerably more room for things to get worse. That said, we are hopeful that the talks will continue to move in a positive direction.

• Despite reassurances from Beijing that it will help Moscow cope with U.S. sanctions, Chinese firms have been reluctant to work with Russian firms. On Thursday, Russian officials stated the country’s airlines have struggled to secure parts from China. The lack of cooperation may be related to firms fearing the violation of trade sanctions. Last week, the Asian Infrastructure Investment Bank, a Chinese entity, suspended lending to Russia and Belarus for a similar reason. Another reason for Chinese firms’ reluctance to sell to Russian firms could be related to the ruble’s depreciation against the yuan. The ruble is sitting near a record low against the yuan, and Chinese firms may prefer to hold off from doing business with Russia until its currency stabilizes at a normal level.
• President Biden has called on the U.S. to officially end trade relations with Russia. The announcement could lead to Russia losing its most favored nation trade status, opening up the country to tariffs. However, a U.S. President cannot unilaterally remove a country’s trade status as the powers lay with Congress. Nonetheless, if Russia loses its status, it will join the club of pariah countries that include Cuba and North Korea. Other G-7 countries are also considering revoking Russia’s most favored nation trade status.
  • Japan has joined the U.S. and EU in its ban of technology exports to Russia. The ban includes semiconductors; Japan holds a 50% market share in many of the categories of materials needed to produce the good.
• In light of sanctions, Russia has still honored its commitment to supply Europe with energy. Its ability to send oil could reflect a willingness to maintain trade ties with the EU. Moscow has also stated it is prepared to repay creditors on the condition that their assets are unfrozen. Since the sanctions have been in place, Russian firms have struggled to find the dollars needed to repay creditors. As a result, there is a growing concern that some of these companies may default.
  • Moscow appears poised to start reappropriating the assets of companies that are leaving Russia. German automaker Mercedes-Benz has warned that over $2.2 billion of its assets are at risk if Moscow follows through on its threat.

Non-Ukraine News

• As gasoline prices start to rise, there are growing calls to suspend gas taxes as a way to bring down pump prices. Six Democratic governors have recently come out in support of the measure. Michigan and Florida have already created legislation to suspend taxes. The move comes as politicians are concerned with bringing down gasoline prices before mid-term elections.
• Treasury Secretary Janet Yellen warned high inflation would likely persist due to the war in Ukraine. Food and energy prices are probably the most vulnerable to the war as Russia is one of the top exporters of oil and wheat.
• The Iran nuclear deal has been put on hold. Last-minute demands by Russian officials have caused Iran to rethink whether it is ready to rejoin the agreement. One of the major sticking points is a guarantee that a new U.S. president cannot overturn the agreement in the future. Unless the U.S. can pass the treaty through Congress, this is a pretty tall ask, as politicians have already expressed uneasiness with the Biden administration’s willingness to court authoritarians to replace Russian oil.

COVID-19:  The number of reported cases is 453,009,597, with 6,028,678 fatalities. In the U.S., there are 79,454,930 confirmed cases with 965,466 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 694,725,135 doses of the vaccine have been distributed, with 556,252,766 doses injected.  The number receiving at least one dose is 254,404,423, while the number of second doses is 216,449,810, and the number of the third dose, granting the highest level of immunity, is 95,632,936. The FT has a page on global vaccine distribution.

• The Transportation Security Administration is extending the mask mandates on airplanes until April 18. The rules show that even as restrictions are becoming more lax, there are still concerns about a new outbreak.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with a brief rundown of the latest updates on the war in Ukraine. We focus on how the war may impact climate change initiatives. Next, we look at the possibility that countries may offer to produce more oil, followed by a brief discussion of international and U.S. news. We conclude with a COVID-19 update.

After two weeks of fighting, Ukraine signaled it was open to a compromise. An aide to Ukrainian President Volodymyr Zelensky stated the country is willing to discuss Russia’s neutrality demand but would not concede any territory. However, another round of talks led to a stalemate in negotiations, as Russia is now demanding that Ukraine should also demilitarize. The two sides are expected to continue negotiations on Thursday in Turkey.

• The Ukraine conflict is starting to impact the global transition to greener energy. A surge in the price of nickel threatens to slow down the production of Electric Vehicles. Automakers rely on nickel for their batteries. The rally in nickel prices was caused by supply disruption concerns related to the war. On Wednesday, Indonesia stated it plans to add as much as 400,000 tons in output this year and possibly 500,000 tons in the following year. The increase in production from Indonesia may offset the loss from Russia; however, there are still concerns that automakers could face a deficit. Thus, automakers are likely to struggle to make a quick switch away from making cars with internal combustion engines to producing cars with electric motor engines.
  • • Additionally, the surge in oil prices has led to a rethink in climate change initiatives. The United Kingdom is considering lifting a ban on fracking as it looks to become less dependent on foreign energy sources. Meanwhile, U.S. calls for increased oil production were rebuffed by shale producers complaining of a lack of access to capital and labor. Although government officials expressed a willingness to work with firms to increase their drilling capacity, energy companies state they are still constrained by investors who favor profitability over drill expansion.
    • As a result of production limitations, countries are starting to make uncomfortable ties with their adversaries as they seek to become less reliant on foreign oil while still maintaining climate goals. Weeks after considering a potential import ban on Chinese solar panels, the EU has decided to ramp up its solar and wind installation by importing more renewable technology from China. Meanwhile, the U.S. is creating warmer ties with former foes Venezuela and Iran as it seeks additional resources for oil to offset the Russian shortfall. As the war in Ukraine continues, we expect there may be a possible rethink of specific global ESG standards as companies and investors grapple with deteriorating market conditions. Relaxing some of these standards could create more favorable investing conditions.
• The Iran nuclear deal ran into a new obstacle on Wednesday. Russia has demanded additional concessions before it can reach an agreement. A representative from Iran seemed to dismiss those demands by stating that Iran would not be deterred by “outside factors” from signing a new deal. However, Russia’s designated role in taking delivery of Iran’s uranium stockpiles could potentially delay an agreement from being signed. If the Iran nuclear deal gets signed, it is estimated that they could add up to 2 million more barrels a day of oil.
• Conflicting messages from OPEC member United Arab Emirates about oil production caused oil prices to whipsaw. On Wednesday, oil prices fell as much as 17% after UAE said it would call on OPEC+ members to boost production. However, hours after making that statement an official from the UAE walked back the comment by reaffirming the country is still committed to the OPEC agreement and its existing monthly production quota. The new statement led to a slight recovery in oil prices.
  • Iraq also said it could ramp up oil production. Last month, the country struggled to meet its quota due to protests and maintenance issues. Nevertheless, the country believes it can potentially deliver up to 7 million barrels a day by 2027.
• As the war rages on, the U.S. is putting more pressure on the Russian economy. The House passed a bill that would ban the import of Russian oil. The Biden administration is also considering imposing sanctions on Russia’s state-owned atomic energy company, Rosatom. In response to the sanctions, Russian Prime Minister Mikhail Mishustin stated Russia would start to reconsider its energy-supply commitments. He also hinted the country would begin prioritizing its wheat supply needs. Because Russia is the world’s largest supplier of wheat, withholding its wheat exports could lead to a rise in global food prices.

Other News

• In South Korea, Yoon Suk-yeol, a conservative candidate, won the presidential election. The win suggests that the country’s foreign policy will become more hawkish toward China and North Korea and friendlier to the U.S. His government will also push for economic growth driven by the private sector.
• The European Central Bank plans to end its quantitative easing program in the third quarter of 2022, one quarter ahead of schedule. The announcement caught investors off guard, as many were expecting the central bank to take a modest approach to QE in response to the war in Ukraine. The hawkish shift by the ECB indicates it is concerned about the rise of inflation throughout the bloc.
• On Thursday, the House passed a $1.5 trillion spending bill. It will fund the government throughout the fiscal year, provide Ukraine with $13.6 billion in aid, and help transition debt contracts from LIBOR. The bill was forced to drop COVID-19 aid after opposition from Democrats. It is expected to be taken up by the Senate on Friday.

COVID-19:  The number of reported cases is 451,091,296, with 6,021,649 fatalities.  In the U.S., there are 79,406,687 confirmed cases with 963,820 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 691,748,065 doses of the vaccine have been distributed, with 554,168,735 doses injected.  The number receiving at least one dose is 254,299,172, while the number of second doses is 216,355,844, and the number of the third dose, granting the highest level of immunity, is 95,499,589. The FT has a page on global vaccine distribution.

• COVID-19 cases in Singapore are starting to decelerate. It suggests the ongoing Omicron wave throughout Asia may also be close to reaching a peak.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with an update on the Russia-Ukraine war, with a particular focus on yesterday’s announcements that the U.S., the U.K., and the EU would ban or work to cut imports of Russian energy commodities.  It also appears that the Russian government may be preparing to implement its own embargo on commodity exports.  We next turn to a range of international and U.S. news that could affect the financial markets today.  We wrap up with the latest developments regarding the coronavirus pandemic.

Russia-Ukraine:  Russian forces continue attacking both military and civilian targets throughout Ukraine, although they are still struggling to seize much territory as they face a motivated, disciplined, and adaptable Ukrainian army that is already employing some insurgency tactics.  Thousands of Ukrainian civilians trying to escape are still coming under attack despite Russian promises to ensure their safe passage.  Meanwhile, Ukrainian President Zelensky effectively continues to lead the country, even posting a video yesterday shot in his normal office to demonstrate his fearlessness and suggests that Russia is too timid to target him.  Among the most important developments over the last day:

• As anticipated, President Biden announced that the U.S. would ban imports of Russian crude oil, natural gas, and coal in order to further punish Russia for launching the war and pressure it to reverse course. The European Union said it planned to cut its imports of Russian natural gas by two-thirds by the end of this year, and the U.K. said it would phase out the importation of Russian oil by the end of the year.  On top of that, private companies in the U.S. and Europe continue to pull back from their operations in Russia on fears of tarnishing their reputations.  On a more positive note, some investors have started to bet that the major central banks and key governments will introduce economic stimulus measures, such as delaying interest-rate hikes, to help offset the impact of the war and its associated commodity supply disruptions.  Optimism about such measures appears to be a driving factor for the jump in prices for risk assets so far today.
  • Russian crude makes up well under 10% of U.S. oil imports, so the practical effect of the U.S. oil import ban may be less than meets the eye. On the other hand, certain U.S. refiners are more dependent on Russian supplies and could feel more of an impact.
  • All the same, after imploring foreign oil producers such as Saudi Arabia and Venezuela to increase their oil exports and help bring down prices, the Biden administration yesterday finally turned to domestic oil producers for help. The State Department’s special envoy and coordinator for international energy affairs said U.S. shale producers should be doing “whatever it takes” to increase output, claiming new drilling is not being held back by White House policies but by investor demands for financial discipline and dividends.
    • While U.S. oil producers are benefitting from today’s high prices, we suspect that any broad expansion of investment and output will require greater assurances than this one statement from a State Department official.
    • To date, President Biden has been reluctant to abandon the “green” policies supported by his party’s progressive wing. Oil producers probably need to see that Biden is willing to jettison that wing politically before they could trust that U.S. policy is indeed becoming friendlier to energy producers again.
  • The main threat to the global economy from the import bans is that they could probably escalate the economic dimensions of the war. Indeed, Russian President Putin overnight issued a decree calling for a ban on certain Russian commodity exports through the end of the year.  The decree gives the government two days to come up with a list of affected exports.  Given Russia’s huge role in supplying many key commodities, an aggressive list could threaten major supply disruptions, even higher prices, slower global economic growth, and renewed volatility in the financial markets, despite the rebound in risk asset pricing so far today.
  • Separately, the Polish government floated a proposal to transfer its old Russian-made MiG-29 fighter jets to the U.S., which would, in turn, give them to the Ukrainian government and replenish Poland’s fighter fleet with used U.S. F-16s. Clearly, the proposal aimed to insulate Poland from Russian accusations of participating in the war against it, but at the end of the day, the U.S. Defense Department rejected the idea as untenable.
  • Perhaps most interesting, several U.S. intelligence officials testified before Congress about where President Putin and the Russian military would go from here. Led by Director of National Intelligence Avril Haines and CIA Director William Burns, the officials made several important assessments.
    • The Russian military is suffering from many shortcomings, ranging from poor morale to insufficient planning and weak logistics. It probably couldn’t control the entire country of Ukraine or install a stable puppet government there with the forces now committed to the war.
    • Compounding the Russian military’s problems, the Ukrainian resistance has proved unexpectedly strong and effective. Even if the Russians win the first phase of the conflict, they will likely face a persistent, highly effective insurgency.
    • Ominously, the officials assessed that President Putin sees the conflict as one he simply cannot afford to lose, so the obstacles he’s facing will prompt him to double down and intensify his attacks on Ukrainian civilians. In the words of CIA Director Burns, “It will be an ugly next few weeks.”

United States-Saudi Arabia-United Arab Emirates:  New reports indicate the leaders of Saudi Arabia and the UAE refused to take telephone calls from President Biden as he sought to boost global oil production in the runup to the Russia-Ukraine war.

• The refusals reportedly stemmed from Saudi and UAE anger at the administration’s Middle East policy, especially its reduced support for their war in Yemen and efforts to counter Iranian aggression in the region.
• The snub by the Saudis and the UAE reflects the downside of the U.S. effort to extricate itself from Middle East geopolitical and security issues.  Regarding the war between Russia and Ukraine, it also suggests some of the world’s most important oil producers will offer little cooperation as the administration struggles to bring down energy prices.  In a word, the snub is yet another bullish factor for global oil prices.

South Korea:  Elections for a new president were held today, although the latest reports suggest the voting is very tight, and it’s not clear who the winner is.  The voting has been dubbed the “unlikeable election” following months of mudslinging and scandal between Lee Jae-myung of the ruling center-left Democratic Party and Yoon Suk-yeol of the center-right People Power Party.

U.S. Fiscal Policy:  Congressional leaders today released a sweeping bill to fund the federal government for the rest of the 2022 fiscal year, setting the stage to avoid a partial government shutdown when the current stopgap spending authorization expires on Saturday.

• Besides appropriating money for the federal government’s general domestic and international activities, the $1.5 trillion bill would ramp up U.S. defense spending and provide about $13.6 billion for humanitarian, economic, and military aid to Ukraine.
• The House is expected to vote on the omnibus legislation Wednesday and send it to the Senate, which will then debate it and vote on it this week. Since the bill results from weeks of negotiation among Congressional leaders of both parties, it should be passed quickly and signed into law by President Biden before the Saturday deadline.

U.S. Postal Service:  Yesterday, the Senate gave final approval to legislation designed to put the U.S. Postal Service on stronger financial footing and avoid a government bailout. A key provision in the bill would undo a requirement in a 2006 law that the Postal Service prefund its retiree health benefits, which the agency projects will save $27 billion over a decade.  The bill would also require postal workers to enroll in Medicare when they reach 65 years old. That change would save the Postal Service about $22.6 billion over a 10-year period.

• The Postal Service has been reporting losses for years, stemming in large part from a drop in first-class mail and the requirement to prefund its retiree health benefits.
• The measure will next go to President Biden’s desk for his signature.

U.S. Labor Market:  Reflecting workers’ increased power in today’s tight labor market, as well as the challenges to the education system from the coronavirus pandemic, more than 4,000 teachers in Minneapolis have gone on strike today.  The teachers are pressing school administrators over wages, hiring, class sizes, and more resources for mental health support.

COVID-19:  Official data show confirmed cases have risen to  449,906,525 worldwide, with 6,016,023 deaths.  In the U.S., confirmed cases rose to 79,369,459, with 961,935 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 considered fully vaccinated now totals 216,273,632, equal to 65.1% of the total population.

 In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 35,496 yesterday, down 43% from two weeks earlier.

• Pfizer (PFE, $47.44) has begun studying its COVID-19 pill in children under 18 years old who are at high risk of developing severe disease.  The study will evaluate whether the five-day treatment Paxlovid (which is separate from its widely used vaccine) can also keep children newly infected by the coronavirus out of the hospital.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Once again, our Comment opens with an update on the Russia-Ukraine War, where Russia appears to be preparing for a major new assault on Ukraine’s capital city, despite its military problems to date.  We next review a number of international and U.S. news items with the potential to affect the financial markets today.  We close with the latest developments related to the coronavirus pandemic.

Russia-Ukraine:  As the Russian military struggles to seize territory from the Ukrainian army, it continues pummeling civilian targets with artillery, missiles, and aerial bombs.  Official and private military analysts believe the Russians are now regrouping and preparing for a new major assault on the capital city of Kyiv within the next day.  At the same time, Russian and Ukrainian officials met again yesterday to discuss a ceasefire and civilian evacuations, but the talks produced only modest agreements to help civilians flee.  There is great skepticism that the Russians will follow through on the deals.  The Russian and Ukrainian foreign ministers are scheduled to meet on Thursday in Turkey, but French President Macron said his many recent talks with Russian President Putin have left him pessimistic that the attack will end any time soon.  For the global economy and financial markets, the principal near-term risk continues to be the possibility of restricted supplies of energy and other commodities from Russia and Ukraine, which will drive up prices and possibly spark a global recession.  The U.S. today is expected to announce that it will ban all imports of Russian crude oil, which could prompt other countries to do the same and set off a scramble for alternate supplies.  The main longer-term risk is that the global economy will continue to deglobalize and fracture into several trading and financial blocs, further boosting costs and shutting off profitable investment opportunities.

• Meanwhile, the Russian military continues to lose large amounts of equipment and many troops.  The documented equipment losses include literally hundreds of tanks, artillery pieces, armored vehicles, trucks, airplanes, and helicopters.  Those losses include not only equipment destroyed but vehicles and equipment captured and now available for use by the Ukrainian army.  Russia’s personnel losses include at least two generals and two colonels killed in action, as well as many troops taken prisoner.
  • Over the weekend, we noted one Ukrainian estimate that 11,000 Russian troops had already been killed in action, while Ukraine and some Western officials said in the middle of last week that Russia had lost over 5,000 troops killed in action.
  • However, these tallies seem high to us.  As shown by the great military historian John Keegan, the ratio of killed to wounded in the projectile age of warfare is typically 1:3 to 1:4, based on the surface area of the human body that covers vital organs (but not adjusting for the extensive use of body armor in today’s advanced militaries).  If the Russians really have had 11,000 killed, that would imply perhaps 33,000 to 44,000 wounded, not to mention troops taken prisoner.  Total Russian troop losses would therefore be at least 44,000 to 55,000, equal to almost 25% of the forces deployed to the Ukrainian border before the war, and almost 50% of the total that actually entered Ukraine in the first week of the conflict.  Losses of that magnitude seem impossibly high to us, even with the incompetence we’ve seen in the Russian operation to date.
  • We suspect that the Russian troop losses of 5,000 to 11,000 so far may include both killed and wounded.  If so, Russian troops killed in action might “only” total 1,000 to 2,500, or 1% to 2.5% of the troops in Ukraine over the first week of the war.  That’s relatively more limited, but the total killed would still be much worse than the 400 or so Russian troops who died in one month of fighting during the takeover of Crimea in 2014.
• Perhaps because of the Russian casualty experience to date and the heavy Western sanctions already imposed, Belarusian President Lukashenko said in recent days that his forces would not be joining in the fight, despite reports last week that Belarusian troops were ready to enter Ukraine.
• Separately, the war and prospects for Western embargoes against Russian oil continue to drive oil and natural gas prices sharply higher.  According to AAA, the average price for a gallon of gasoline in the U.S. has hit a near-record $4.065 per gallon.  The Biden administration is therefore scouring the globe for fresh oil and gasoline production that could ramp up quickly and quash the price spikes sparked by the war.  The administration is even talking with the Venezuelan government on their ability to help, perhaps reflecting skepticism that U.S. production could ramp up quickly or be palatable to anti-fossil fuel progressives here at home.  Separately, the EU today will outline a plan to cut its natural gas imports from Russia by two-thirds over the next year.  To do so, the plan calls for the EU to import more liquefied natural gas, rapidly boost renewable energy generation, push out the end of coal burning, and cut demand with efficiency measures.
  • The enormous jump in energy prices is probably the primary threat to the U.S., European, and other major economies.  As energy prices rise, consumers and businesses worldwide will need to curtail other spending, raising the threat of a recession and stagflation.  The Fed and other major central banks may still start to hike interest rates in the near term, but the resulting economic slowdown makes it even more likely they will curtail their rate hikes well before they otherwise would have.
  • More broadly, the prices for wheat, corn, nickel, and many other commodities continue to surge.  Increased grain costs (except for rice) will likely have an outsized impact on many poorer countries in the coming months, probably prompting political unrest in some countries.
  • Naturally, the hit to confidence and the rise in commodity costs will hit corporate profits and continue to weigh on stock prices in the near term.  With yesterday’s sharp stock price declines, the Dow Jones Industrial Average has now fallen into a correction (down more than 10% from its most recent peak), and the NASDAQ Composite Index has fallen into a bear market (down more than 20% from its most recent high).  As we have noted before, a quick end to the war could allow a sharp rebound in stock prices, although any such rebound could be short-lived if inflation takes too long to come down.

Japan:  Surging crude oil and natural gas prices because of the war have naturally prompted renewed interest in maintaining or increasing Europe’s nuclear energy capability, but the same is happening in Japan.  Former Defense Minister and senior ruling party official Itsunori Onodera today said in an interview that speeding up the restart of nuclear reactors halted in the wake of the Fukushima nuclear disaster may be Japan’s “best option” for riding out any oil and gas shortages that result from sanctions imposed on Russia.  The trends continue to look positive for uranium and nuclear companies.

China:  The American Chamber of Commerce in China released the results of a survey showing that less than half its members were optimistic that the Chinese government was committed to opening its market to more foreign investment over the next three years, down from 61% a year earlier.  Over one-third said they would reduce investment in the country because of an uncertain policy environment.

• Coupled with the rupture between Russia and the Western democracies, the survey underlines the extent to which globalization is in retreat and the global economy is splitting into two or more economic blocs that will have much less interaction than in the past.
• As we have warned repeatedly, deglobalization and shortened supply chains will serve to hike costs for businesses, feed higher inflation, and weigh on corporate profitability going forward.

Iran:  According to a senior EU diplomat, talks with Iran to revive its 2015 nuclear deal have now progressed to the point where “political decisions” are needed to finalize an agreement.

• The official said no more formal meetings or expert-level talks are being held, as the fate of the deal is now in the hands of top political leaders in the participating countries.
• Given the Biden administration’s political vulnerability because of high energy prices, we suspect it will be inclined to accept a deal in hopes that it would quickly ramp up global crude oil supplies and drive prices lower.

U.S. Digital Currency Regulation:  The White House is set to release an executive order this week tasking several federal agencies with conducting a broad review of cryptocurrencies, the cryptocurrency markets, and the possibility of creating a U.S. digital currency.  The agencies will have up to six months to conduct their reviews and prepare recommendations for public review.  While the U.S. government is woefully behind the curve on regulating the booming cryptocurrency trade, we still suspect that new regulations and/or the development of a central bank digital currency in the U.S. are a risk for digital currencies going forward.

U.S. Environmental Regulation:  The Environmental Protection Agency yesterday proposed new standards that would require engine manufacturers to lower nitrogen-oxide emissions from tractor-trailer-size trucks, as well as other delivery trucks, cement mixers, and trash trucks.  The initiative suggests that even with the Russia-Ukraine war raging and inflation remaining at extreme levels, the Biden administration is not backing away from new regulations that could further boost costs and weigh on profits for U.S. businesses.

COVID-19:  Official data show confirmed cases have risen to  448,030,162 worldwide, with 6,008,440 deaths.  In the U.S., confirmed cases rose to 79,339,497, with 960,314 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 considered fully vaccinated now totals 216,204,455, equal to 65.1% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 37,118 yesterday, down a full 43% from just two weeks earlier.
• Moderna (MRNA, $126.46) said it would never use its COVID-19 vaccine-related patents to stop others from manufacturing its vaccine in more than 90 low- and middle-income countries.  It has, however, signaled it would soon begin enforcing patents in wealthier countries.
• As the pandemic enters its third year, a cluster of new studies show that about a third of the children in the youngest grades are missing reading benchmarks, up significantly from before the pandemic.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with an update on the Russia-Ukraine War.  The key developments include the U.S. and Poland looking into ways to provide Ukraine with more fighter jets (which obviously would be seen by Russia as exceedingly provocative) and the U.S. considering a ban on Russian oil imports.  Those actions go far toward explaining the dramatic moves in the financial markets so far today.  We also provide a brief overview of other key international and U.S. news.  We wrap up with the latest developments regarding the coronavirus pandemic.

Russia-Ukraine:  Over the weekend, Russia continued to attack civilian targets throughout Ukraine, killing dozens, while Chinese Foreign Minister Wang Yi stressed China’s support and “everlasting friendship” for Russia.  Ukrainian and Russian negotiators are scheduled to meet for their third round of cease-fire talks on Monday, but prospects for a breakthrough were uncertain as the Kremlin signaled its determination to pursue the war.  Meanwhile, Ukrainian President Zelensky continued to press the U.S. and NATO to implement a no-fly zone over Ukraine, even though such an action would likely result in a direct conflict between the West and Russia.  The U.S. and NATO continue to reject that option, and U.S. officials are considering a deal in which Poland would provide Soviet-era fighter jets to Ukraine so it can continue to contest its airspace with the Russians.  Separately, U.S. Secretary of State Blinken said the U.S. is talking with European partners about banning imports of Russian oil, a prospect that has pushed global oil prices up to $130 per barrel or more so far this morning and pushed several European stock indexes down to bear-market levels.  Natural gas, gold, wheat, nickel, and a range of other commodity prices are also surging, while the need to wean Europe off its reliance on Russian energy continues to spark discussions of accelerating the Continent’s switch to renewable energy.  Importantly, even U.S. Treasury yields are rising, suggesting renewed concern about inflation.  Within Russia, domestic protests against the war appear to be growing.  Finally, another important piece of news over the weekend was the leak of a purported letter on the crisis from an official in Russia’s Federal Security Service, the successor of the KGB’s domestic security operation.

• In an English translation of the letter circulating on the internet, the official claims that:
  • The war against Ukraine is a mistake equal to Russia’s failed war against the Japanese in 1905.
  • Decision-making about the war was too concentrated at the top, leading to most of the Russian shortcomings so far.
  • Russia can’t mobilize militarily now to get control of the situation, since mobilization plus sanctions will implode the economy.
  • Russia will soon face grave domestic instability as the population responds to the hardships brought on by the invasion and the Western sanctions.
  • Use of a tactical nuclear strike in Ukraine is possible, not for any military reason, but to scare the West.
  • Russia’s foreign intelligence service is trying to plant evidence that Ukraine was developing nuclear weapons. [Note: This would explain Russia’s focus on seizing the Chernobyl nuclear site, as well as the Zaporizhzhia nuclear generating station.]
  • The economic implosion from the sanctions and efforts to improve the supply situation in Ukraine will threaten the viability of Russian forces in Syria.
• While those observations are instructive, we at Confluence have our own capabilities in translating and interpreting the underlying Russian text, and our reading of the document provides several important additional findings:
  • The official who wrote this was probably involved in the Chechnya conflict.  The letter refers specifically to Ramzan Kadyrov, the Russian-imposed leader of Chechnya.  The letter suggests that some kind of Chechen special operations group was sent to Kyiv to assassinate Ukrainian President Zelensky, but they got decimated before they could act.  This is consistent with reports over the weekend that Russia is recruiting Syrian fighters experienced in urban warfare to help counter the Ukrainians’ efforts to defend major cities.
  • In any case, the translation circulating on the internet is not complete.  There are several sentences and paragraphs left out, although most aren’t necessarily critical.  Most of the sentences not translated merely give more color regarding how upset the writer is, and they provide a bit more detail on his view of the fiasco in Syria.
  • However, at the end of the Russian document, there are several important untranslated sentences in which the writer says, “Out of cynicism, I would only add that I don’t think VV Putin will cross the red line of destroying the whole world [i.e., a strategic nuclear strike].”
    • “First, there isn’t just one person that takes that decision.  Although one person starts the process in motion, there’s a lot of people involved.  It isn’t a ‘one-man show.’”
    • “Second, there are many doubts that all that would be successful.  Experience teaches that the greater the transparency and control, the easier it is to show deficiencies.  And where it’s not understood who exercises control, and how, but they always flaunt outcomes, it’s the opposite.  I’m not sure that the nuclear system functions as advertised.  After all, you have to replace nuclear warheads every ten years.”
    • “Third, and this is most disgusting and sad, personally I don’t believe that someone who won’t even allow members of the Federation Council or his own closest representatives and ministers to get close to him would sacrifice himself.  Whether it’s fear of the coronavirus or fear of assassination, it’s not important:  If you’re afraid to allow the most trustworthy people to come close to you [remember the 20-foot-long conference table], how could you decide to destroy yourself and those close to you?”
• In any case, the risk of a major miscalculation remains high.  In the near term, that is likely to keep boosting prices for energy commodities, grains, and precious metals.  However, if the Russian military ultimately proves to be a paper tiger and Western resolve brings an end to the crisis, or if Russian forces quickly take control of Ukraine and the situation stabilizes, equities and other risk assets may well rebound smartly.

China:  Over the weekend, the Chinese government said it would target an economic growth rate of 5.5% for 2022.  The target is the smallest since China began setting such benchmarks in 1994, but it is actually a much heavier lift than the 2021 target of 6%, given last year’s pandemic-related statistical distortions and the mounting economic headwinds.  The relatively aggressive target signals further government intervention is likely on the way, including an expected ramp-up in government infrastructure spending.

Australia:  One important fallout from the Russia-Ukraine War is that the world’s liberal democracies have been scared into boosting their defense capabilities.  Over the weekend, the Australian government said it would build a $7.5 billion base for nuclear-powered submarines on the country’s east coast.

• That comes after many other countries, such as Germany and Italy, have said they will boost their defense budgets going forward.
• Even if the Russia-Ukraine War ends soon, the liberal democracies probably won’t soon forget Russia’s aggression and China’s support.  The boost to defense spending, therefore, is likely to be long-lasting, which could prove to be an opportunity for investors.

U.S. Cryptocurrency Regulation:  Even as the U.S. and other major governments look set to tighten their regulation of digital currencies, Senate Finance Committee Chairman Wyden has warned that clamping down too hard would stifle innovation and ultimately hurt the U.S.  We still expect that digital currencies will face increased regulation going forward, but Wyden’s statement serves as a reminder that there are political forces working in the other direction that could limit or delay some of the regulations.

U.S. Fiscal Policy:  With the ongoing economic recovery boosting tax revenues, a range of state governments are enacting or considering enacting tax cuts.  The states moving in that direction range from Tennessee and Mississippi to Wisconsin and Georgia.  State-level tax cuts would probably not be as economically significant as federal cuts would be, but if they are widely adopted, they could help provide a boost to the national economy and stock prices as consumers face higher inflation and deplete their pandemic-related excess savings.

COVID-19:  Official data show confirmed cases have risen to  446,404,737 worldwide, with 6,000,394 deaths.  In the U.S., confirmed cases rose to 79,271,466, with 958,621 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 considered fully vaccinated now totals 216,147,515, equal to 65.1% of the total population.

Virology

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 38,999 yesterday, marking a 43% decline from two weeks ago.
• In Japan, the government today lifted its quasi-emergency pandemic measures in Niigata, Nagano, Fukushima, and 10 other prefectures, as new cases dip and the burden on regional medical systems comes under control.
• In contrast with trends in the U.S. and other key developed countries, China logged its highest daily total of locally transmitted infections in more than two years, with the highly transmissible Omicron variant of the coronavirus posing a fresh test to China’s ability to smother outbreaks quickly.
  • The government said it detected 526 domestic infection cases yesterday, 214 of which were symptomatic.
  • Most of those who tested positive were in the eastern port cities of Qingdao and Shanghai, with others detected in the southern province of Guangdong and the northeastern province of Jilin.

 Economic and Financial Market Impacts

• While the U.S. press has published lots of stories about the “Great Resignation,” or the big rise in people switching jobs amid the strong post-pandemic job market, the trend is now spreading to other countries, including Australia and, potentially, even Japan.

View PDF