by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with several indicators of increasing tensions between the U.S. and members of the evolving China-led geopolitical bloc, including Russia and Saudi Arabia.  We next review a range of other international and U.S. developments with the potential to affect the financial markets today, including new analysis showing that a rebound in large-cap technology stocks was the key reason that the U.S. stock market was able to rise last month despite the crisis that engulfed small and mid-sized banks.

United States-China:  Republican and Democratic members of the House Select Committee on the Chinese Communist Party will embark on a three-day visit to Silicon Valley and Hollywood this week to talk about U.S.-China relations with top technology and entertainment executives.  Some U.S. finance, technology, and entertainment firms have resisted the growing effort by policymakers to suppress China’s expanding military power and geopolitical influence.  While the members of Congress will listen to the firms’ perspectives, we suspect they will also use the meetings to educate the executives about the Chinese threat to U.S. security and the need to put security above narrow business interests.

• Separately, China appears to be ramping up its response to recent U.S. restrictions on its semiconductor industry. In what appears to be retaliation, the Chinese government last week opened a cybersecurity investigation into Micron Technology (MU, $60.34), a top U.S. maker of DRAM memory chips.
• The Micron investigation is likely meant to be a warning to other countries with big memory-chip firms, such as South Korea. In all probability, China is trying to caution those countries that if they sign on to the U.S.’s clampdown on advanced technology transfers to China, the Chinese government will hinder their key companies’ activities in China.

China:  The Caixin purchasing managers’ index for manufacturing came in at a seasonally adjusted 50.0 in March, falling short of expectations and marking a big decline from the 51.6 registered in February.  Like all major PMIs, this one is designed so that readings over 50.0 indicate expanding activity.  The current Caixin and official PMIs suggest China’s post-pandemic manufacturing recovery has quickly lost steam, at least in part because of weakening demand overseas.  If they continue, such tepid readings are likely to be a headwind for risk assets going forward.

Russia-Saudi Arabia-United States:  Yesterday, the Organization of the Petroleum Exporting Countries and its Russia-led allies unexpectedly announced that they will cut their total crude oil output by 1 million barrels per day.  Saudi Arabia alone said it will voluntarily cut its production by 500,000 bpd, while other OPEC+ members said they will cut their output by smaller amounts.  Russia said it will extend its 500,000-bpd cut announced last year.

• The move was aimed at reversing a recent decline in oil prices prompted by fears of slowing economic growth around the world. It also appears to be Saudi’s retaliation after the Biden administration last week said it had no near-term plan to replenish the U.S.’s Strategic Petroleum Reserve despite previously giving the Saudis assurances that it would buy oil if prices fell.  In any case, oil prices so far today have surged more than 5%, with Brent now trading at $84.13 and WTI at $79.71.
• Saudi Arabia’s cooperation with Russia also underlines its increasingly close alliance with Russia and the rest of the evolving China-led geopolitical bloc. That is likely a harbinger of increasingly tense U.S.-Saudi relations and further threats to global oil supplies.

Russia:  In a sign that internal political tensions are rising, the Federal Security Service (FSB, successor to the KGB) is reportedly confiscating the passports of senior officials and state company executives to prevent overseas travel, information leaks, and defections.  The move reflects deep suspicions about the loyalty of the country’s civilian elite, many of whom privately oppose the war in Ukraine and are chafing over its impact on their lifestyles.

• Separately, nationalist blogger Maxim Fomin, known publicly as Vladlen Tatarsky, was killed by a bomb yesterday while conducting a meet-and-greet event at a café in St. Petersburg. Fomin had been a vocal advocate of Russia’s invasion of Ukraine, although he had also sharply criticized the Ministry of Defense for its failures and shortcomings in running the invasion.  He likely had enemies in Russia’s official defense bureaucracy, although the lone suspect arrested in the case so far is a woman who had previously attended a demonstration against the war last year.
• On the Ukrainian battlefield, Russian officials said they have finally taken control of central Bakhmut, the eastern Ukrainian city they have focused on for months and suffered huge casualties trying to capture. However, Ukrainian officials say they still control other parts of the city and will continue fighting to degrade Russia’s forces.

Finland:  Petteri Orpo and his center-right National Coalition Party leveraged a focus on economic issues to narrowly win Sunday’s parliamentary election, ousting Prime Minister Marin and her center-left Social Democratic Party.  However, the National Coalition only came away with 48 of the 200 seats in parliament, slightly more than the 46 seats for the right-wing Finns Party and the 43 seats for the Social Democrats.  That will likely make it difficult for Orpo to form a governing coalition in the coming weeks.

Switzerland:  Federal prosecutors announced that they will investigate whether any criminal behavior was involved in last month’s government-led takeover of Credit Suisse (CS, $0.8898) by UBS (UBS, $21.34).  Numerous aspects of the rushed deal have arisen, but the prosecutors haven’t specified any particular offenses that they are targeting.

U.S. Stock Market:  If you’re wondering how the U.S. stock market was able to perform so well last month despite the crisis in small- and mid-sized banks, it appears the answer is that large technology firms did quite well.  Since the beginning of the crisis in early March, new analysis shows that Apple (AAPL, $164.90) and Microsoft (MSFT, $288.30) alone contributed more percentage points of gains to the S&P 500 price index than all financial stocks in the index subtracted.  In turn, that reflects how investors looking for an eventual retreat in interest rates are already positioning themselves back into technology (probably too early, we think).

U.S. Labor Market:  New analysis from the Wall Street Journal shows that the nation’s strongest job markets in 2022 were Nashville, TN; Austin, TX; and Jacksonville, FL.  The rankings were calculated based on five criteria, including each city’s 2022 unemployment rate, labor-force participation rate, changes to employment levels, size of the labor force, and wage rates.  In contrast, cities that did well right after the end of the pandemic, such as Salt Lake City, UT and Phoenix, AZ slipped in the rankings.

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