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, including news that Russian President Putin has launched a major purge and reorganization of his top military command amid ongoing shortcomings in the war effort.  We next review other international and U.S. developments with the potential to affect the financial markets today, including wide-ranging fallout from the war and signs of further labor union actions.  We close with the latest news on the coronavirus pandemic.

Note:  Because COVID-19 has become more endemic and in most countries isn’t disrupting the economy or politics as much as it did previously, we will drop our dedicated COVID-19 section beginning July 1.  We will continue to cover pandemic news as needed within our main text.

Russia-Ukraine:  Even as Russian forces continue to make slow, plodding progress in seizing Ukraine’s northeastern Donbas region, new intelligence reports indicate President Putin has fired Army General Alexander Dvornikov from his role as the commander of Russia’s Southern Military District (SMD), which also entailed leading the invasion of Ukraine.  Putin has instead named Army General Sergey Surovikin as head of the SMD and, separately, Colonel-General Gennady Zhidko, the head of the Military-Political Directorate of the Russian Armed Forces, as commander of the invasion.  Notably, the Military-Political Directorate is focused on maintaining morale and ideological control over the military, just as it did in the Red Army during the Cold War.  These personnel moves, along with others, suggest Putin is carrying out a broad purge of underperformers, which in itself is additional evidence that the Russian forces are still struggling with massive shortcomings in the face of strong resistance from the Ukrainians.

• In other war news, a major Russian oil and gas refinery close to the Ukrainian border was set ablaze today after a drone allegedly controlled by Kyiv’s forces crashed into it.  Video on social media showed two drones crashing into the facility and setting off the fire, and local authorities claim they have recovered the remains of both drones.  If the drones prove to be “kamikaze” weapons recently provided by the West, the attack on Russian soil would further inflame President Putin and tempt him to escalate the conflict.
• Indeed, Russian military forces have been staging mock missile attacks on NATO member Estonia as part of their planned exercises close to the Estonian border.  Reports indicate a Russian military helicopter also crossed into Estonian airspace with its transponders off, prompting Tallinn to call in the Russian ambassador to complain.
• As Russia continues crimping its natural gas deliveries to Western European countries in retaliation for their sanctions and other support to Ukraine, International Energy Agency chief Fatih Birol warned the Europeans must prepare immediately for the complete severance of Russian gas exports this winter.
  • According to Birol, “The nearer we are coming to winter, the more we understand Russia’s intentions.  I believe the [gas] cuts are geared towards avoiding Europe filling storage, and increasing Russia’s leverage in the winter months.”
  • To help cushion the blow, Birol urged Western European governments to take further measures to cut demand, temporarily fire up old coal-fired electricity plants, and keep ageing nuclear power stations open.
  • He also suggested that any additional CO₂ emissions from burning coal would be offset by an acceleration in Europe’s plans to cut its reliance on imported fossil fuels and build up renewable generation capacity.
• Industry executives say the Indian government has encouraged its state-owned energy companies to scoop up cheap Russian crude that otherwise wouldn’t have a market because of Western sanctions.  The Indian purchases, which include new long-term contracts, will take the sting out of the sanctions and essentially help provide funding for Russia’s invasion of Ukraine.

Italy:  The anti-establishment Five Star Movement, the largest party in Prime Minister Draghi’s national unity government, is splitting up amid internal disputes over the war in Ukraine.

• Foreign Minister Luigi Di Maio, one of the party’s most prominent members and a strong supporter of Italy’s backing of Ukraine, said he would form a new, pro-government party that will remain in the governing coalition.  He will take about 60 of the party’s 227 lawmakers with him.
• That could eventually prompt Former Prime Minister Conte to pull his more radical followers out of the coalition and potentially bring down the government.

Georgia:  After the European Commission recommended against giving the country EU candidate status last week, tens of thousands of Georgians have been protesting in the streets of Tbilisi and casting blame on the government.  The protests against the pro-Kremlin leadership are another example of how Putin’s invasion of Ukraine has backfired by further isolating Russia and its supporters.

United Kingdom:  As a strike by railway workers has already shut down much of the U.K.’s transportation system, the country’s main teacher unions are threatening to walk off the job this autumn if the government doesn’t agree to a 12% pay hike for their members.  The news illustrates how labor has come to feel more empowered in major developed countries, threatening further strikes and other measures to bring down wealth and income inequality.  If successful, the labor actions could lead to higher business costs, more inflation, narrower profit margins, and potentially lower equity valuations going forward.

Global Travel Chaos:  With the end of pandemic restrictions leaving people desperate to travel but airlines stuck with insufficient workers, airports across the globe are struggling with flight delays, cancellations, long lines, and lost baggage.  Some airport officials are bracing for the disruptions to last into the fall, forecasting that pent-up demand for travel won’t let up.

U.S. Monetary Policy:  Treasury Secretary Yellen, a former Federal Reserve governor, yesterday argued that the Fed’s current interest-rate hikes could bring down inflation without pushing the economy into recession.  According to Yellen, today’s unusually low labor force participation rate means there are plenty of workers on the sidelines who could start looking for work because of rising wages.

• In Yellen’s view, increased labor supply coupled with rising interest rates would help bring down inflation before economic growth slows too much.
• We would note, however, that the labor force participation rate hasn’t shown signs of improving much, even after many months of high and rapidly rising wage rates.
• We also may get Fed Chair Powell’s view on the matter today, when he begins two days of testimony before Congress on the central bank’s monetary policy plans.  Powell and other current Fed policymakers are clearly panicked about inflation and seem willing to risk an economic slowdown by tightening policy aggressively, even if they aren’t willing to say so publicly.  Concern over what Powell might say in that regard is probably a key reason global risk markets are weaker so far today.

U.S. Fiscal Policy:  President Biden today will propose a three-month suspension of the federal gasoline tax of 18.4 cents per gallon.  As we noted in our Comment yesterday, the federal tax only amounts to about 3.7% of today’s average retail price, illustrating how Biden is stuck with few good ways to address soaring energy prices in the near term.  On top of that, lawmakers in Congress look unlikely to approve the plan.

U.S. Regulatory Policy:  The Biden administration yesterday indicated it plans to issue a rule eliminating virtually all nicotine from cigarettes to make them less addictive and help people quit smoking.  Under the plan, the FDA will formally propose the rule on May 23, although it probably wouldn’t take effect until years after that date.

U.S. Labor Market:  While the major economic data series are starting to hint at a slowdown in the economy, more granular private data and anecdotes are doing the same.  According to the Wall Street Journal, more companies in multiple industries have been rescinding job offers in recent weeks.  Many major firms have also announced reduced hiring plans, hiring freezes, and even layoffs.  We expect labor demand to cool further in response to factors such as rising interest rates, high inflation, slowing economic growth in China, and uncertainty regarding the Ukraine war.

COVID-19:  Official data show confirmed cases have risen to  540,643,457 worldwide, with 6,322,412 deaths.  The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Brazil.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  In the U.S., confirmed cases have risen to 86,456,273, with 1,014,040 deaths.  In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,924,152, equal to 66.8% of the total population.

• In the U.S., the latest wave of infections appears to be topping out, but hospitalizations are still accelerating with their usual lag.  The seven-day average of newly reported cases stands at 96,218, down 15% from two weeks ago.  The seven-day average of people hospitalized with confirmed or suspected COVID-19 came in at 29,934 yesterday, up 2% from two weeks earlier.  New COVID-19 deaths are now averaging 289 per day, down 11% from two weeks earlier.
• Moderna (MRNA, $129.99) released clinical trial results showing its two-strain vaccine booster increases immunity against the fast-spreading Omicron subvariants.  In a request that regulators approve the use of the vaccine, the company argued that the higher level of protection compared with the company’s existing vaccine justified switching to the new booster, which could help prevent “a large rise in cases” in early autumn.

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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 Russian forces continue their creeping seizures of territory in eastern Ukraine, and President Putin keeps trying to undermine Western support for Kyiv by cutting off energy exports to Europe.  We next review other international and U.S. developments with the potential to affect the financial markets today, with a particular focus on leftist political victories and labor unrest.  We wrap up with the latest news on the coronavirus pandemic.

Note: Because COVID-19 has become more endemic and in most countries isn’t disrupting the economy or politics as much as it did previously, we will drop our dedicated COVID-19 section beginning July 1.  We will continue to cover pandemic news as needed within our main text.

Russia-Ukraine:  Russian forces continue to make slow progress in seizing territory in Ukraine’s northeastern Donbas region, and they have reportedly been ordered to take the entire Luhansk administrative region by next Sunday.  They now control virtually all of Severodonetsk except for its Azot industrial complex.  They are also fighting hard to keep the Ukrainians from pushing them all the way to the Russian border north of Kharkiv.  Meanwhile, the Ukrainian military over the weekend appeared to step up its artillery and missile attacks in the Donbas, presumably using new, more advanced weapons arriving from the West.  The Russians retaliated with missile attacks on cities across Ukraine.  Russian authorities continue to struggle with consolidating control of occupied territories in the face of persistent Ukrainian partisan pressure.

• Lithuania, which controls the only overland rail route linking Russia’s exclave Kaliningrad with mainland Russia, at the weekend, began limiting the export of iron, steel, and other goods covered by EU sanctions to the territory.  The Russian government said it would respond harshly if Lithuania does not restart deliveries to Kaliningrad.
• With Russia now cutting almost half its usual natural gas deliveries to Western Europe, worries are growing that the Continent won’t be able to build enough inventory to get it through the coming winter.  As President Putin no doubt planned, the resulting surge in energy prices has already started to undermine Western Europeans’ support for their leaders and could potentially lessen their future commitment to Ukraine.
  • EU officials hope to fill their gas storage facilities to 80% capacity during the relatively low-demand summer months to avoid triggering a rationing system that would favor households over factories.
  • However, analysts believe Russia’s current deliveries will only allow for a buildup to 70% of capacity.  Fearing that scenario, over the weekend, Germany said it would restart coal-fired power plants and offer incentives for companies to curb natural gas consumption; Austria said it would take similar steps.
  • As evidence that Europe’s effort to wean itself off Russian energy should help U.S. energy providers, a U.S. natural gas exporter has now struck the first binding long-term deals to provide Germany with liquified natural gas.  The LNG will come from new export terminals in Louisiana.

China:  On Friday, the navy launched its third aircraft carrier, christened Fujian.  The vessel will now require about two years of fitting out and sea trials before entering service around 2024.

• Fujian will bring China a step closer to its goal of being able to project carrier air power in both the western Pacific Ocean and the Indian Ocean.
  • As a rule of thumb, an aircraft carrier can only be on station about one-third of the time.  It would spend another third of the time in port undergoing maintenance and a final third in transit and training.
  • To meet its goal of being able to project power in both oceans simultaneously and continuously implies China will ultimately try to build out at least six modern carriers, along with their battle groups.  (For comparison, the U.S. currently has 11 carriers in service to protect its interests globally.)
  • Since China’s currently deployed carriers, Shandong and the Liaoning, are much less modern and capable than Fujian, they probably wouldn’t be included in the target of six carriers.  That implies China will likely build at least five more carriers in the coming years.
• Although Fujian is somewhat smaller than the latest U.S. carriers, she marks a step-up in capability from Shandong and Liaoning.  Notably, Fujian sports three electromagnetic catapults in her bow, allowing her to launch a wider variety of aircraft and get those assets in the air at a much faster cadence than China’s older carriers, which rely on an un-catapulted “ski jump” launch system.

Global Left-Wing Populism:  While the military developments described above are important, electoral victories by left-wing populists in Europe and Latin America over the weekend could be just as consequential.

• In France, a new coalition of left, far-left, and green parties known as NUPES surged to win enough districts in run-off legislative elections to deprive President Macron’s centrist alliance of its majority in the National Assembly.  Of the 577 seats in parliament’s lower house, Macron’s coalition will have 245, the NUPES alliance will have 131, the far-right National Rally will have 89, and the center-right Les Républicains will have 61.
  • Given the policy differences between these groups, the results could potentially leave Macron’s policy priorities largely paralyzed for the next five years.  A key casualty could be his proposed pension reform, which aims to cut costs and boost work incentives by raising the retirement age.
  • With NUPES now the largest opposition group, its leader, Jean-Luc Mélenchon, will be in a much better position to push his policy ideas.  Among his top goals, he wants to stop Macron’s pension reform in its tracks and roll back Macron’s other labor market liberalizations.  He also wants France to stop complying with EU regulations that he doesn’t agree with and withdraw France from NATO’s integrated military command.
• Meanwhile, in traditionally conservative Colombia, former Marxist rebel and Bogotá mayor Gustavo Petro handily won the presidential election over right-wing populist and real estate tycoon Rodolfo Hernández.  As his country’s first leftist president, Petro has vowed to provide greater support for lower-income Colombians by hiking taxes on the rich, boosting spending on health and other public services, and implementing other wealth-redistribution policies.  Petro’s other stated priorities include strengthening Colombia’s environmental protection regulations (including a ban on new oil and gas developments) and building closer relationships with Chile, Venezuela, and other leftist-led countries in the region.
• We have long argued that politics today can’t be divided simplistically between left and right.  Each wing is now riven between elites and populists.  Right-wing populists have been ascendent in recent years, but one could argue that’s only because of “elite capture,” in which wealthy, well-educated, professional politicians have molded their rhetoric to the anger and anxieties of working-class conservatives, even though their true focus is on promoting elite interests like low taxes on capital and minimal regulation.  One could also argue that other elites have hijacked the concerns of many working-class liberals, say, by embracing identity politics.
  • The new left-wing populist victories in Europe and throughout Latin America are a reminder that either flavor of elite capture could leave working-class voters deeply disappointed and disrespected.
  • Those voters could remain susceptible to shifting their allegiance to the other wing so long as economic inequality and lack of opportunity are unaddressed.

Global Labor Unrest:  Along with the resurgence in left-wing populist political movements, we are also seeing a resurgence in labor unrest.

• In the U.K., some 40,000 workers at 13 separate railroad companies have gone out on strike after failing to secure a new contract granting higher wages, better working conditions, and protection from layoffs.  The strikers plan to shut down the nation’s railways today, Thursday, and Saturday, while workers at London’s subway system plan to strike today as well.  The action, which will be Britain’s biggest rail strike in a generation, could continue indefinitely and may spread to other industries.
• In Canada, signal and communications workers at Canadian National Railway (CNI, $108.11) on Saturday went on strike after they rejected a company offer to raise wages by 10% and improve other benefits in a new three-year contract.
• In the U.S., workers at an Apple (AAPL, $131.56) retail store in Baltimore became the company’s first to vote to unionize.  Just as important, there is a risk that West Coast longshoremen will strike when their contract expires next month.

Global Cryptocurrency Market:  In South Korea, prosecutors have banned Terraform Labs employees from leaving the country amid an investigation into the company and its co-founders following the late-May collapse of its TerraUSD stablecoin.

• The criminal investigation in South Korea is just one of many legal actions launched in response to the TerraUSD debacle.
• The collapse has helped drive down the value of other digital assets.  Over the weekend, Bitcoin (BTC-USD, $21,035.50) fell as low as $17,744.90 before recovering modestly.

Israel:  Prime Minister Bennett, whose fragile coalition has recently started to splinter, said he would dissolve parliament and call for new elections.  Polls show Former Prime Minister Netanyahu’s Likud party is currently the most popular, but not so popular that it could win an outright majority in parliament when the elections are held sometime in the coming months.

U.S. Monetary Policy:  Over the weekend, two Federal Reserve officials signaled the central bank would continue to hike interest rates aggressively at its next policy meeting in July.  After the Fed’s big 75-basis-point hike in the benchmark fed funds rate last week, board member Christopher Waller said he would support a similar-sized move in July so long as economic data continues to show strong growth and high inflation.  Separately, St. Louis FRB President Bullard said the Fed has to meet investors’ expectations for continued big rate hikes.  Cleveland FRB President Mester said it would take a couple of years to return consumer price inflation to the Fed’s target of 2%.

U.S. Fiscal Policy:  President Biden said he hopes to decide by the end of this week whether to ask Congress to suspend the federal gasoline tax temporarily to help bring down the cost of fuel.  The federal tax of 18.4 cents per gallon amounts to 3.7% of today’s average retail price of $4.98 per gallon.

U.S. Economy:  Economists surveyed by the Wall Street Journal have dramatically raised their estimate of the probability of recession, now putting it at 44% in the next 12 months.  A recession likelihood at that level usually is seen only on the brink of or during actual recessions.  The increased probability reflects pressures ranging from the Fed’s ongoing rate hikes to high energy prices, the economic slowdown in China, and the war in Ukraine.

COVID-19:  Official data show confirmed cases have risen to  539,783,312 worldwide, with 6,320,517 deaths.  The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Brazil.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  In the U.S., confirmed cases have risen to 86,297,195, with 1,013,493 deaths.  In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,924,152, equal to 66.8% of the total population.

Virology

• In the U.S., the latest wave of infections appears to be topping out, but hospitalizations are still accelerating with their usual lag.  The seven-day average of newly reported cases stands at 96,417, down 3% from two weeks ago.  The seven-day average of people hospitalized with confirmed or suspected COVID-19 came in at 30,076 yesterday, up 3% from two weeks earlier.  New COVID-19 deaths are now averaging 311 per day, up 17% from two weeks earlier.
• China remains the key outlier in terms of global pandemic responses with its draconian “zero-COVID” policies.  Over the weekend, hundreds of guests at a casino in Macau were put under lockdown after a mass testing program revealed numerous infections.

Economic and Financial Market Impacts

• Several Southeast Asia economies are bouncing back as strict pandemic entry controls are removed and a resurgence of tourism fills hotels.  The bounce back, which is expected to last through the end of the year, is most noticeable in Vietnam, Malaysia, Indonesia, and the Philippines.
• In contrast, a new survey by the European Union Chamber of Commerce in China found that its members’ top business concern is the government’s strict pandemic-control policies.  For the second straight year, that concern topped issues like China’s rising labor costs, slowing economic growth, and tensions with the U.S.
  • Approximately 69% of respondents said the government’s “zero-COVID” policies are the biggest challenge for businesses in China right now.
  • About 23% of respondents said they are considering shifting current or planned investments out of China.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Today’s Comment starts with a brief overview of central bank news from around the world, beginning with the market impact of the Federal Reserve’s decision to raise rates and ending with the broader market impact of global monetary tightening. Next, we examine the latest updates from the Russia-Ukraine war. We wrap up the report with U.S. economics and policy news and our daily COVID coverage.

Central Bank News: The Federal Reserve, Bank of Japan, Bank of England, Swiss National Bank, and European Central Bank all announced important news.

Federal Reserve: The Federal Reserve raised its benchmark rate by 75 bps, the most significant hike since 1994. The market widely expected the increase as the hotter-than-anticipated CPI report suggested that inflation will probably be more challenging to tame than many FOMC members had initially expected. As a result, the Fed stated it is “strongly committed” to returning inflation to its 2% target.

Following the Fed meeting, Chair Powell stated that hikes of 75 bps would not be common and that typical hikes will probably be around 50 or 25 bps. The market reacted positively to the comment as many investors feared the Fed could raise rates by 75 bps or more throughout the rest of the year. Equities, bond prices, and crypto all rallied following Powell’s statement. The latest dots plot has the terminal fed funds rate at around 3.35%, suggesting this 75-bps hike was likely a one-off. This sentiment was further supported by the dissent from traditional hawk Kansas City Fed President Esther George in favor of a 50-bps hike. That said, the day after the Fed meeting, equity futures dipped over concerns that the central bank will not be successful in navigating a soft landing.

Bank of Japan: The BOJ is under pressure to lift its yield target of 25 bps. The yen has weakened significantly over the last few weeks due to concerns that the central bank is not doing enough to curtail inflation. However, the Fed’s decision to raise rates by 75 bps has at least temporarily provided some relief to the yen. There is growing speculation that the BOJ could decide to lift its yield cap to 50 bps. If this happens, the yen will likely appreciate against the U.S. dollar.

European Central Bank: The ECB governing council announced its plan to create a “new anti-fragmentation instrument” to quell concerns about a potential European debt crisis. Following the central bank’s decision to raise rates, there have been growing concerns about fragmentations within the EU. Fragmentation is when borrowing costs among countries diverge. To prevent interest rates from rising too much, the ECB will likely implement a form of yield curve control. One way to keep rates down involves the bank reinvesting proceeds from its portfolio into the bonds of vulnerable European economies. The move would likely mean the euro could weaken against the dollar.

Swiss National Bank: The SNB lifted its policy rate for the first time since 2007, which caught many investors by surprise. The central bank raised its benchmark rate by 50 bps to -0.25% and signaled that it might tighten more to keep inflation in check. Besides fighting inflation, the SNB president stated that the bank would buy foreign currencies to prevent excessive appreciation of the Swiss franc.

Bank of England: The BOE raised its benchmark rate by 25 bps to 1.25%, the bank’s fifth rate hike since December. The BOE policy rate has risen to its highest level since 2009. In a statement, the bank stated it would raise rates more aggressively to stamp out inflation. Moreover, the rate hike was less than investors expected, leading to a drop in the sterling.

In short, the Federal Reserve’s decision to raise rates by 75 bps has given other central banks more confidence to increase their respective policy rates. We suspect the major central banks are following the Federal Reserve’s lead in tightening, but their reluctance to become more hawkish is rooted in the desire to keep their country’s currencies from appreciating against the dollar. As the Fed continues to tighten monetary policy, we suspect global equities could become less attractive. However, banks may provide some investment opportunities as the industry is better positioned to benefit from potentially higher margins.

Russia-Ukraine: Fighting in Ukraine is currently at a deadlock, with neither side making noticeable gains. However, Russia appears to have the upper hand. President Biden pledged an additional $1 billion of military aid to help the Ukrainian soldiers in their war efforts. The new weapons will help Ukraine overcome Russia’s massive firearm advantage.

• French President Emmanuel Macron and Italian Prime Minister Mario Draghi are heading to Ukraine to meet with Volodymyr Zelensky. On the trip, the three leaders will discuss Europe’s ongoing support for Ukraine in its fight against Russia. Meanwhile, Xi held a birthday phone call with Vladimir Putin to reaffirm China’s support for Russia. The talks were reportedly cordial; however, the two sides have offered different accounts of the call. Moscow alleged Beijing had offered to provide economic and military aid, while Beijing has maintained that it has only pushed for peace with no aid guaranteed. The differing description of the conversation highlights the underlying tensions between Beijing and Moscow. As long as China does not commit to supporting Russia significantly, the risk of war contagion is limited.
• Russia reduced its supply of gas to Germany and Italy. The move comes as Moscow looks to pressure the EU to drop sanctions. European natural gas prices have surged.
• NATO is looking to adopt the German model as it seeks to boost defense on its eastern flank. The German approach involves identifying military units that can be deployed to vulnerable countries on short notice as opposed to having troops stationed there indefinitely. The integration of European militaries is another sign that the Russian war is leading to more cooperation among NATO members.

U.S. Economic and Policy News: Agricultural exporters are resilient in the face of inflation, and policymakers are scrutinizing crypto.

U.S. Exporters: U.S. food exporters have shown strong pricing power even with a strengthening dollar. The ability to push costs onto their customers suggests related companies may be attractive for diversification. The chart below shows the terms of trade index, which compares the price of exports relative to the price of imports. Since the war broke out in Ukraine, food producers in the U.S. have had significantly more success in pushing the rising costs onto consumers abroad than their foreign competitors. This could mean that U.S. exporters have relative advantage over their peers.

Crypto scrutiny: The House of Representatives Ways and Means Committee chair has asked a government watchdog to weigh in on crypto being used in retirement accounts. Policymakers have complained about the recent decline in digital assets and are looking for ways to regulate the crypto industry. The increased government scrutiny suggests that crypto is becoming more of a regulatory risk.

COVID-19: Official data show confirmed cases have risen to 537,209,701 worldwide, with 6,314,191 deaths. The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Australia, and Germany. (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.) In the U.S., confirmed cases have risen to 85,935,634, with 1,012,577 deaths. Regarding the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,883,332, equal to 66.8% of the total population.

• FDA advisors approved the use of the Moderna vaccine for children six months to five years old.

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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 both sides continue to face resource constraints and are struggling to make significant new territory gains.  We next review other international and U.S. developments with the potential to affect the financial markets today, including an emergency meeting called by the European Central Bank to address a sell-off in the government bonds of Italy and other economically weak members of the Eurozone.  We close with the latest news on the coronavirus pandemic.

Russia-Ukraine:  The Russian and Ukrainian militaries remain essentially deadlocked in their struggle to control eastern and southeastern Ukraine, with each side finding it difficult to generate the force needed to make significant gains.  In a desperate attempt to increase manpower, the Russian military is reportedly preparing to raise the age limit for military service from 40 to 49 and drop an existing requirement for past military service to assist in the tank and motorized infantry units.  The Russians are also reportedly accelerating their efforts to integrate occupied Ukrainian territory into Russia proper, using methods as diverse as introducing the ruble as legal tender and changing the international calling prefix for cell phones to the Russian code instead of the Ukrainian one.

• Partly reflecting the West’s war-related sanctions on Russia, which will force it to shut in some oil wells, the International Energy Agency today said it would be hard for global oil supply to meet rising demand next year.
  • In its first forecast for 2023, the IEA predicts global demand next year will grow to 101.6 million barrels per day, up 2.2 mbpd from 2022.
  • The agency predicts U.S. production will grow at a robust pace, but Russian output will fall, and total OPEC+ output will decline by 520,000 bpd in 2023.
• Meanwhile, defense ministers from NATO and other countries providing weapons to Ukraine are meeting today in Brussels to discuss what additional aid they can provide.  It’s important to remember that some countries have already sent virtually all the weapons they can spare without endangering their own defense.  Even the U.S. has used up some critical stores and will need months or even years to replenish them (although doing so will likely be a positive for defense contractors, as we have repeatedly noted).

Eurozone Monetary Policy:  The ECB said it will hold an emergency meeting today to discuss a recent sell-off in the bonds of economically weaker countries in the bloc’s south.  In a process referred to as “fragmentation,” investors had dumped those bonds in recent days after the ECB said it would conduct a series of interest-rate hikes but didn’t unveil a new tool to shield highly indebted economies in southern Europe from the effect of the rate rises.

• The announcement has given a boost to European stock markets, the euro, and European sovereign debt.
• The yield spread between German and Italian 10-year government bonds narrowed from 2.5% on Tuesday to 2.2% so far today, indicating expectations that the ECB will adopt preferential policies to maintain the demand for southern countries’ debt even as the bank hikes interest rates and sells down its balance sheet holdings.
• Expectations are high that the ECB will have to announce a large, dramatic program to curtail the risks to Italy, Greece, and other weaker countries.  ECB board member Isabel Schnabel further raised expectations in a speech last night when she said, “Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits. And our track record of stepping in when needed backs up this commitment.”
• However, because expectations are now running high, an unexpectedly timid decision at the end of the meeting would likely spark a sell-off in European assets.

European Union Tax Policy:  Poland is reportedly ready to accept an EU plan to adopt the OECD’s global deal on minimum corporate taxes agreed to last year.  If Poland drops its veto and no other members come up with last-minute objections, the EU will implement a minimum effective tax rate of 15% on corporations.

European Union-United Kingdom:  The European Commission announced it would resume a previously paused legal action against the U.K. for failing to implement full border checks in Northern Ireland.  The move is in retaliation for the British government’s announcement yesterday of a proposed law that would allow it to abrogate the Northern Ireland protocol contained in the post-Brexit EU-U.K. trade deal.

• The EU infringement procedure can last several months before a case is referred to the EU’s top court, which can impose fines on the UK.
• The EU also has other means of pressure, such as increased customs checks on goods coming from Britain into countries such as France, Belgium, and the Netherlands.
• As we’ve written before, the increasing tensions over the Northern Ireland protocol threaten to touch off growing trade restrictions between the U.K. and the EU.  Such restrictions could be especially painful for the U.K. economy and U.K. stocks.

Hong Kong:  Monetary authorities in Hong Kong said they sold more foreign-exchange reserves to maintain the Hong Kong dollar’s longstanding peg to the greenback, taking its total outlay this year to $5.48 billion.  The move comes as the continuing surge in the greenback threatened to push Hong Kong’s dollar out of its permitted exchange rate band of 7.75 to 7.85 per U.S. dollar.

Laos:  Today, Moody’s (MCO, $257.68) downgraded Laotian sovereign debt one notch further into “junk” territory, to Caa3 from Caa2.  The cut in Laos’s bond rating reflects the risks involved for less-developed countries as global interest rates rise, global energy and food prices rocket higher, and the dollar continues to strengthen.

Chile:  New reporting suggests that a splinter group of Mapuche indigenous people has been increasing its attacks on logging companies, other businesses, and police in central Chile.  The attacks are putting increased pressure on the country’s new leftist president, Gabriel Boric, to reimpose order.  With Chileans also set to vote on a new, leftist constitution later this year, any failure by Boric to get control over the situation would further undermine Chile’s attractiveness to investors.

U.S. Monetary Policy:  Today, Federal Reserve officials wrap up their latest policy meeting, with surging inflation readings leading some observers to think they could hike interest rates by a very aggressive 75 basis point when they release their decision at 2:00 pm ET.  We have even heard chatter about a possible 100-basis-point hike.  The policymakers will also release their latest “dot plot” projections for the economy and the path of future interest rates.

• A hike of 75 basis points would be the biggest increase since 1994 and would leave the benchmark fed funds rate in a range between 1.50% and 1.75%.
• While an aggressive hike could well push asset values down farther, investors should keep in mind that an unusually aggressive hike, like 100 basis points, could be taken as a sign that the Fed is getting ahead of the inflation problem and spark a market rebound.

U.S. Gasoline Market:  Faced with political doom because of soaring inflation and gasoline prices, President Biden has sent a letter to several major U.S. refiners, warning them against price gouging and asking them to take immediate action to increase the supply of gasoline, diesel, and other refined products.  He said his administration was prepared to use its emergency authorities to increase capacity in the near term, if necessary.  The letter signals an increased risk that politicians may try to intervene in the market to bring prices down, perhaps even including a windfall profits tax.

U.S. Natural Gas Market:  U.S. natural gas prices fell some 16% yesterday after an LNG shipping facility in Texas said a fire last week would knock it offline until late this year, greatly reducing export capacity but boosting the supply of gas in the U.S.  Gas for delivery in July ended at just $7.189 per million British thermal units. Futures prices for deliveries through February shed at least 10% on the day, suggesting markedly diminished fears about shortages this coming winter.

U.S. Cryptocurrency Market:  Bitcoin (BTC-USD, 22,166.98) fell another 5.4% yesterday, marking a decline of about 68% from its all-time high in November last year of $67,802.  So far this morning, it is down another 8% to approximately $20,100, and other digital currencies are even weaker.  The continuing decline in Bitcoin and other digital assets largely reflects the impact of the Fed’s increasingly aggressive monetary tightening.

COVID-19:  Official data show confirmed cases have risen to  536,720,870 worldwide, with 6,312,601 deaths.  The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Australia.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  In the U.S., confirmed cases have risen to 85,762,625, with 1,011,925 deaths.  In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,768,203, equal to 66.8% of the total population.

• In the U.S., the latest wave of infections appears to be topping out, but hospitalizations are still accelerating with their usual lag.  The seven-day average of newly reported cases stands at 105,605, up 7% from two weeks ago.  The seven-day average of people hospitalized with confirmed or suspected COVID-19 came in at 29,728 yesterday, up 8% from two weeks earlier.  New COVID-19 deaths are now averaging 322 per day, up 8% from two weeks earlier.
• Illustrating how easily China can slip back into mass lockdowns under President Xi’s “zero-COVID” policy, Beijing is already reimposing sweeping lockdowns after an outbreak traced to a single bar produced hundreds of new infections.
• Following our report yesterday that China’s strict testing protocols are progressively alienating everyday citizens, new reports point to increasing anger that authorities have manipulated the health codes assigned to people on their cell phones to limit protests.
  • Since late May, hundreds of people have taken to the streets in China’s central Henan province, calling for authorities to ensure the return of their deposits that were frozen in four rural banks in the province.
  • To keep outsiders from traveling to Henan to join in the protests or press for their deposits, authorities evidently changed their health codes to indicate they were infected with COVID-19 and were therefore ineligible to travel to the province.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

We open our Comment with an update on the Russia-Ukraine war, where we discuss how the conflict has become a competition of force generation and the two sides’ abilities to marshal resources for the fight.  Next, we review other international and U.S. developments with the potential to affect the financial markets, including a discussion of the Federal Reserve’s latest policy meeting, which starts today.  We wrap up with the latest news on the coronavirus pandemic.

Russia-Ukraine:  It is now clear that the war has become a competition of force generation.  The Russian military continues to seize small tracts of land in Ukraine’s eastern Donbas region, and it will probably capture the small city of Severodonetsk soon, but a wide range of evidence suggests it is too battered to do much more than that.  The evidence also suggests it won’t be able to rebuild its strength with sufficient new troops and equipment so long as President Putin declines to call a general mobilization.  Meanwhile, the Ukrainian military is running out of manpower, equipment, and ammunition (especially ammunition for its older Soviet-made weapons), and advanced weapons from the West are entering the battle only slowly.  In other words, the war has become a laboratory for “defense economics” like the world hasn’t seen in decades.

• In this situation, it looks like the war could well drag on.  The ultimate winner will probably be the country that most successfully martials its resources and the resources of its allies for the fight.  Russia may have the advantage in terms of sheer numbers of people, weapons, industrial capacity, and experience, but Ukraine has the will and flexible military management to use its limited resources more efficiently and with greater effect.  As long as Ukraine has access to Western military aid, it will likely continue to fight, although, at some point, the two sides will probably exhaust themselves and start searching for a negotiated solution.
• Mykhailo Podolyak, a leading adviser to Ukrainian President Zelenskyy, tweeted out a bold shopping list to tackle his country’s main equipment shortages and repel Russian forces.  Calling for “heavy weapons parity” with Russia, Podolyak said Ukraine’s needs include 1,000 155mm howitzers, 300 multiple-launch rocket systems, and 500 tanks.

Global Oil Market:  In its monthly market report, the Organization of the Petroleum Exporting Countries (OPEC) said production among its 13 members dropped by 176,000 barrels a day last month to average roughly 28.5 million barrels per day.  The report showed that modest output increases by Saudi Arabia, the UAE, and Kuwait were offset by declines in countries such as Libya and Nigeria.  The data buttresses concerns that despite OPEC and its partners pledging to hike output, they may not be able to.  If so, that would point to the potential for further large increases in energy prices and general inflation going forward.

United Kingdom-European Union:  As expected, yesterday, Prime Minister Johnson’s government unveiled a proposed law that would allow it to tear up parts of its Brexit agreement with the EU, stoking fears of a trade war and drawing condemnation from the trade bloc.

• The EU could eventually retaliate against the U.K. by revoking parts of the Brexit agreement, including the zero-tariff arrangements for each side’s goods, or move to suspend that agreement in its entirety.
• Johnson’s gambit aims to appease pro-Brexit members of his ruling Conservative Party, who are chafing at the protocol’s requirement for customs checks on goods traveling from Britain to Northern Ireland.  However, given the EU’s potential trade retaliation, the move is risky.  It could be a cloud over the British economy and financial markets in the coming months.

United States-China:  In a dramatic example of the way the world is fracturing into separate geopolitical and economic blocs, Congressional negotiators working on a U.S. competitiveness bill have agreed on language that would require U.S. companies and investors to disclose certain new outbound investments to “adversary countries” like China and authorize the federal government to review and block them on national security grounds.  The U.S. government has long regulated certain high-technology exports and inbound foreign investment, but the proposed law would mark a significant new increase in the government’s ability to regulate outbound investment that could benefit foreign adversaries.

• The rules would apply to outbound investments in sectors deemed critical to supply chains or involving designated “critical and emerging” technologies.  Those sectors and technologies include semiconductors, large-capacity batteries, pharmaceuticals, rare-earth elements, biotechnology, artificial intelligence, quantum computing, hypersonics, financial technologies, and autonomous systems such as robots and undersea drones.
• The provisions would apply to greenfield investments, such as the construction of new plants, to deals such as joint ventures that involve the transfer of knowledge or intellectual property, and to capital contributions. including venture capital and private equity transactions.
• The bill reflects the solidifying consensus in Washington that China aims to supplant U.S. global leadership and that American capital and expertise are aiding the buildup of Chinese military and economic power.

United States-Australia:  In a step that would help sever the U.S.’s reliance on Chinese rare earths and rare earth processing, the Department of Defense has signed a deal with an Australian firm to build one of the first U.S. domestic heavy rare earths separation facilities.  The U.S. currently has no operating commercial-scale processing facilities, raising concerns in Washington that the country could be cut off from these critical minerals in the future if relations with China deteriorate further.

• Under the deal with Lynas, China would be bypassed entirely from the production cycle.
• The Defense Department is also separately funding a heavy rare earth processing project at a mine in California.

U.S. Monetary Policy:  Federal Reserve officials today begin their latest policy meeting, with surging inflation readings leading some observers to think they could hike interest rates by a very aggressive 75 basis point.  We have even heard chatter about a possible 100-basis-point hike.  The policymakers will also release their latest “dot plot” projections for the economy and the path of future interest rates.

• A hike of 75 basis points would be the biggest increase since 1994 and would leave the benchmark fed funds rate in a range between 1.50% and 1.75%.
• Fears of aggressive monetary tightening, more pandemic lockdowns in China, and the growing risk of recession weighed heavily on a range of assets yesterday.  The S&P 500 stock price index fell a sharp 3.9% to end the day in bear-market territory, with a total decline of 21.8% from its recent high on January 3.  Cryptocurrency values continue to fall as of this writing, amid signs of greater turbulence for the industry.
• Notably, the U.S. yield curve also briefly inverted again overnight, which many investors will see as additional proof of an impending recession.  The curve is now basically flat, with the yield on the 10-year Treasury note at 3.321% and the yield on the two-year Treasury at 3.311%.
• While an aggressive hike could well push asset values down farther, investors should keep in mind that an unusually aggressive hike, like 100 basis points, could be taken as a sign that the Fed is getting ahead of the inflation problem and spark a market rebound.  We shall see . . .

U.S. Tech Industry:  Apple (AAPL, $131.88) is under investigation by Germany’s antitrust watchdog over whether the company’s tracking rules for third-party apps give it preferential treatment or undermine its rivals.  The move is the latest sign of growing regulatory risks for major U.S. tech firms.

U.S. Servant Economy:  One interesting take on today’s high inflation and rising interest rates is that they threaten the budding “servant economy,” consisting of on-demand services like those of Uber (UBER, $21.57) and DoorDash (DASH, $58.38).  With inflation accelerating and interest rates rising, funding for such startups may be drying up.

COVID-19:  Official data show confirmed cases have risen to  535,940,921 worldwide, with 6,310,750 deaths.  The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Australia.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  In the U.S., confirmed cases have risen to 85,632,808, with 1,011,543 deaths.  In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,727,733, equal to 66.8% of the total population.

Virology

• In the U.S., the latest wave of infections appears to be topping out, but hospitalizations are still accelerating with their usual lag.  The seven-day average of newly reported cases stands at 106,795, down 2% from two weeks ago.  The seven-day average of people hospitalized with confirmed or suspected COVID-19 came in at 29,642 yesterday, up 9% from two weeks earlier.  New COVID-19 deaths are now averaging 324 per day, down 12% from two weeks earlier.
• A panel of advisers to the FDA will meet today to consider whether the use of the vaccine from Moderna (MRNA, $117.13) should be expanded to include children ages 6 through 17.  If the panel votes in favor, an FDA authorization could come within days, opening up the use of Moderna’s vaccine to children for the first time in the U.S.

Economic and Financial Market Impacts

• Although renewed pandemic lockdowns and mass testing in China have sparked terror among global investors, analysts at one Chinese brokerage see a silver lining.  According to the analysts, the 10.8 billion COVID-19 tests expected to be carried out in China from April through June will pump $26 billion into the economy, enough to lift the country’s economic growth rate by 0.62%.
  • Officials in Beijing have ordered that China’s free mandated testing be paid for out of local government budgets, so the spending will show up in China’s gross domestic product as “government consumption,” partially offsetting what is likely to be a significant drop in personal consumption spending.
  • One downside is that the big testing costs will be a financial burden for many local governments, especially those already struggling with high debts and rising interest rates.

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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; Russian forces continue to make some plodding progress in seizing territory in eastern Ukraine, while the Ukrainian forces look like they’re facing more problems with ammunition shortages.  We next review other 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:  Russian forces continue to attack and seize small areas of Ukraine’s eastern region of Donbas while maintaining defensive lines in the areas it has seized in the south of the country.  In the Luhansk and Donetsk oblasts in the Donbas region, the Russians continue trying to encircle Ukrainian forces and take control of the strategically important city of Severodonetsk.  Ukrainian troops continue to repel many of the Russian attacks.  However, officials in Kyiv say the Ukrainian military is running low on ammunition for its Soviet-era artillery and has not received enough supplies from its allies to keep the Russians at bay.  The shortage of ammunition has put Ukrainian troops at a growing disadvantage in the artillery-driven war of attrition in the country’s east, with Russia’s batteries now firing several times as many rounds as Ukraine’s.

• Although Turkey continues to hold up the bids by Sweden and Finland to join NATO in response to Russia’s invasion, NATO Secretary General Stoltenberg insisted it was still possible to overcome Ankara’s “legitimate” concerns over terrorism and arms sales “within a reasonable time.”  Stoltenberg’s conciliatory comments suggest allied officials are working on a comprise that will allow the two countries to complete their membership process in the coming months.
• Some European producers of chemicals, fertilizer, steel, and other energy-intensive goods are now shutting down in the face of competition from factories in the U.S. and other regions where energy costs are much lower and haven’t faced the same kinds of disruptions from the war.  Natural-gas prices are now nearly three times higher in Europe than in the U.S.
• Even though the war has cut off most Ukrainian wheat exports and helped touch off skyrocketing wheat prices, the Argentine government said it is considering increasing its 12% tax on wheat exports and potentially introducing a new “unexpected profit” tax on companies that analysts say would hit commodity exporters such as farmers.  The move will likely exacerbate the global food crisis touched off by the war.

Global Market Rout:  Global investors are selling off a wide range of assets today as they respond to Friday’s report of accelerating consumer price inflation in the U.S. and weekend news of new COVID-19 cases in China.  At least one survey showing a large majority of academic economists now expect rising interest rates and high inflation to push the U.S. into a recession by next year, along with higher unemployment.  Major stock price indexes around the world are down sharply, with futures on the S&P 500 suggesting U.S. stocks will open in bear market territory.  Bitcoin and other major cryptocurrencies have fallen especially sharply after $12 billion crypto lender Celsius Network halted customer withdrawals in the latest sign of intensifying strains across the digital assets industry.  The value of Bitcoin (BTC-USD, 23,789.58) is now down almost 20% since Friday.

• Now that the stage seems set for the Federal Reserve and other major central banks to hike interest rates even more aggressively, government bonds are also selling off.  At this writing, the yield on the 10-year Treasury note has risen to an 11-year high of 3.238%, compared with 3.156% on Friday.
• In contrast, the dollar continues to strengthen, especially against the yen, which continues to be hammered by the Bank of Japan’s commitment to yield curve control.  As of this writing, the yen is trading at approximately 135 per dollar, its weakest level since 1998.  The BoJ today made its biggest daily fixed-rate purchase of government bonds since July 2018 to keep Japanese 10-year yields at or below the bank’s 0.25% ceiling.

China:  Securities regulators and industry associations have instructed local and foreign banks to rein in executive pay levels, despite recent signs that President Xi Jinping was moderating his drive to promote “common prosperity” in other key sectors, especially high technology.  The news could be another reason for today’s rout in global risk markets.

Japan-South Korea:  In another important signal that Japan and South Korea are set to bury the hatchet on some other their outstanding grievances against each other, South Korean Defense Minister Lee Jong-sup said at the big Shangri-La Dialogue in Singapore that his country plans to step up cooperation with Japan over regional security threats.  Lee specifically mentioned working with Japan to counter North Korea’s missile threats, but the cooperation would also be useful to counter China’s growing assertiveness in the region.

United Kingdom-European Union:  Prime Minister Johnson’s government today plans to unveil a proposed law that would rewrite the Brexit agreement’s Northern Ireland protocol by ending the oversight role of the European Court of Justice as well as EU control over state aid and value-added tax in the region.  EU leaders have fiercely criticized the plan, which would likely worsen trade ties between the two economies and potentially feed into the global supply disruptions that are helping boost inflation.

France:  In the first round of legislative elections over the weekend, Jean-Luc Mélenchon’s leftist alliance gained strong support, although probably not enough to give it a majority in the National Assembly in the final-round voting next weekend.

COVID-19:  Official data show confirmed cases have risen to  535,316,609 worldwide, with 6,309,612 deaths.  The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Australia.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  In the U.S., confirmed cases have risen to 85,515,980, with 1,011,277 deaths.  In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,714,657, equal to 66.8% of the total population.

• In the U.S., the latest wave of infections already appears to be topping out, although hospitalizations are still accelerating with their usual lag.  The seven-day average of newly reported cases now stands at 103,193, down 6% from two weeks ago.  The seven-day average of people hospitalized in the U.S. with confirmed or suspected COVID-19 came in at 29,672 yesterday, up 10% from two weeks earlier.  New COVID-19 deaths are now averaging 331 per day, down 11% from two weeks earlier.
• In both mainland China and Hong Kong, cases are starting to rise again, raising the risk of further strict lockdowns that could disrupt factory production, exacerbate global supply disruptions and inflation, and further encourage some firms to relocate production to other countries.  Under President Xi’s draconian “zero-COVID” policies, the problem isn’t just lockdowns but an onerous system that requires people to undergo constant testing and to have testing certificates before accessing many public services or going to public venues.  That increases the chance that the Chinese population will eventually push back against Xi and his policies.
• Taiwan is also seeing a rebound in cases, raising the prospect of further disruptions in its globally important semiconductor factories.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Equities futures are trading lower this morning after the CPI report was hotter than expected. Today’s Comment starts with a brief update on the Russia-Ukraine war. Next, we review the latest international news, focusing on the ECB’s hawkish shift. We examine some U.S. economic and policy news and conclude with our COVID-19 coverage.

Russia-Ukraine: There are no major breakthroughs in Ukraine. The most intense fighting is taking place in Severodonetsk. Ukrainian forces have claimed to have made progress but are still waiting for new artillery to overcome Russia’s massive firepower. Moscow has made taking over the city a key objective in its war. That being said, Russia is having less success in the South, where troops are fighting over territory stretching from Kherson and Zaporizhzhia provinces.

• Russian President Vladimir Putin compared himself to Russian Tsar Peter the Great, who led a conquest of the Baltic coast in a war against Sweden in the 18^th He stated that Peter the Great did not take land from Sweden but reclaimed the regions that belonged to Russia. The nationalistic tone of Putin’s speech suggests that he believes the Ukraine war is a way for Russia to restore its glory. As a result, it is unlikely that Putin will accept anything less than victory in its war against Ukraine. This outcome could mean that commodities will remain elevated for the foreseeable future, and global growth will probably slow. If we are correct, safe-haven, fixed-income securities will likely be attractive as they should provide some protection from the adverse outcomes of the war and a slowing global economy.
• The U.S. has requested that India not purchase too much oil from Russia. India has taken advantage of discounted oil prices caused by Western sanctions by drastically ramping up its purchase of Russian crude. The ability to buy cheap oil from Russia has allowed India to avoid the same energy price shocks seen in Europe. The U.S. has tolerated India’s oil purchases for two reasons: 1) India’s purchases of Russian oil relieve the demand for petrol in other parts of the world, and 2) the U.S. views India as a strategic ally in its goal to offset Chinese influence in the Indo-Pacific. Moreover, it is becoming clear that Washington’s patience may be wearing thin. The U.S. wants to reduce Russia’s ability to finance its war in Ukraine. As it looks into possible price caps, there is growing talk of hitting potential violators with secondary sanctions. This outcome may create a situation where India is forced to choose between supporting the U.S. and Russia. As we have mentioned in previous reports, the war in Ukraine is putting loyalty among allies to the test. Countries trying to play both sides of this war have benefitted so far, but as the war grows longer, that could change. India ran a trade surplus of nearly $12 billion with the U.S. in 2021, three times the total value of goods and services India exported to Russia in the same year. Hence, India’s economic interests suggest it could side with the U.S if forced to choose.
• Russia warned of direct military confrontation with the West if cyberattacks continue to target the country’s infrastructure. The warning comes after the Russian housing ministry website was hacked over the weekend. An internet search of the site led to a “Glory to Ukraine” sign written in Ukrainian. Moscow alleged the attacks were coming from the United States. Both sides are using cyber warfare to disrupt information. However, Russia’s response suggests that Moscow increasingly views the attacks as hostile, especially as the war continues. We do not consider the remarks from Moscow to lead to imminent military conflict with the West. Instead, the comment signals that Russia is frustrated with the level of success the U.S. has gained with its cyberattacks. Regarding markets, it is a signal that the U.S. government has demonstrated the capability of not only launching an attack but also having a great defense. This bodes well for U.S. businesses. Last year’s Colonial Pipeline hack may have given the U.S. government a wake-up call to make a much-needed upgrade to defensive capabilities, which we assume is the reason we have not had such disruptions since.

 International news:

• Chinese ride-hailing app Didi ($2.36) will be delisted from the NYSE on Friday. The ride-hailing company is being forced to delist as a condition by Chinese regulators to lift a ban on new customers. The removal of Didi from the NYSE suggests regulators are still trying to maintain a tight grip over its tech sector.
• The European Union’s executive arm is expected to recommend Ukraine for candidate status for joining the bloc. Ukraine has been pushing for immediate admission into the European Union since Russia started its invasion. The recommendation will not lead to an expedited admission process, but it does put the country on the path to joining. Ukraine’s entrance into the EU depends on member countries’ unanimous approval. Ukraine’s acceptance will likely be challenging given that many countries within the bloc have close ties with Russia and are therefore unlikely to approve its admission.
• The European Central Bank’s hawkish shift has led to concerns that high-debt countries may struggle to repay. Following the announcement of the ECB’s policy change, the spread between Italian and German 10-year bonds increased by the most in over two years. The increased rates and rising inflation will make it harder for the European Union to avoid contraction. Financial services companies, particularly in Germany, may be attractive in this environment as higher rates generally make it easier for banks to increase their net interest margins.

U.S. Economic and policy News:

• The Biden administration is exploring setting standards for federally financed EV charging stations. The measure is part of the bipartisan infrastructure bill.
• The latest CPI report rose to a 40-year high in May, leading to doubts about whether the Fed will pause interest rate hikes late this year. The Fed is in a tough spot. Much of the inflation is driven by outside factors beyond its control (the war in Ukraine, lack of home inventories, and ongoing supply chain issues). However, it must maintain the perception that it can rein in inflation using its available tools. As a result, the Federal Reserve may be forced to raise rates to cool demand, even if it slows the economy.

COVID-19: Official data show confirmed cases have risen to 534,295,684 worldwide, with 6,306,726 deaths. The countries currently reporting the highest rates of new infections include the U.S., Taiwan, Germany, and Australia. (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.) In the U.S., confirmed cases have risen to 85,329,812, with 1,010,805 deaths. In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 221,601,089, equal to 66.7% of the total population.

• Shanghai resumed large-scale testing of COVID-19 just 10 days after the city ended its lockdown. The increase in testing is due to an unexpected rise in cases, sparking concerns of a new outbreak.

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