by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

Today’s Comment begins with a range of U.S. news, including a detailed readout from President Biden’s call with Russian President Putin yesterday.  We next turn to international news, including an important report on how the Chinese government is planning to regulate future overseas stock listings.  We end with the latest developments relating to the coronavirus pandemic.

United States-Russia-Ukraine:  In a video call yesterday, President Biden apparently issued a tougher-than-anticipated warning to President Putin that if he launches an invasion of Ukraine, as U.S. intelligence believes he may be planning, the NATO allies will respond with severe economic, diplomatic, and military punishments.  For example, National Security Advisor Sullivan suggested Biden threatened to block Russian natural gas shipments to Europe through its newly completed Nord Stream 2 pipeline under the Baltic Sea in the event of an attack on Ukraine.  Biden also warned that the U.S. would respond to an attack on Ukraine by boosting its deployment of troops and military equipment in Eastern Europe.  According to a sober readout from a Kremlin spokesman, Putin complained about strengthening ties between NATO and Ukraine and demanded: “reliable, legally fixed guarantees that rule out eastward NATO expansion and the deployment of offensive strike weapons systems in states adjacent to Russia.”  However, the White House insisted Biden made no commitments or concessions to the Russian demands.

• The threat to shut down Nord Stream 2 illustrates how much the retirement of German Chancellor Merkel has strengthened Biden’s hand in dealing with Putin.  U.S. and German officials have had intense discussions on the issue.  Merkel’s outgoing team and the team of incoming Chancellor Olaf Scholz appear confident that Scholz will take a harder line on Putin than Merkel, who was usually reluctant to put German industrial interests at risk.  (The Scholz coalition will also probably take a tougher line on Chinese President Xi.)
• Analysts have also suggested the U.S. would significantly ratchet up the pain on Russia if it cut off the country from the SWIFT international payments system.  Blocking Russia from trading dollars for rubles would be particularly disruptive for the country since it could leave China as Russia’s only significant oil market.
• We also note that U.S. officials have suggested blocking Russian companies from access to global capital markets.  Given that U.S. officials have started taking such steps against Chinese firms listed on U.S. stock exchanges, that probably shouldn’t be taken as an idle threat.  In the event of an attack on Ukraine, the threat of forced delisting would probably be particularly negative for Russian stocks trading in the U.S.

U.S. Fiscal Policy:  Speaking at a Wall Street Journal conference, Democratic Senator Joe Manchin declined to commit to voting for his party’s roughly $2 trillion social-policy and climate package, citing concerns about inflation and the length of the programs.

• Coupled with continuing resistance from Democratic Senator Kyrsten Sinema, Manchin’s stance shows Democrats are still at risk of not getting the legislation passed or only getting a significantly watered-down version.
• Separately, Congressional leaders have struck a deal that paves the way to raise the federal government’s borrowing limit and avert a looming crisis over the U.S. debt ceiling.  The House passed the legislation yesterday, and the Senate is expected to follow suit on Thursday.

U.S. Monetary Policy:  In a new poll by the Financial Times, more than half of the leading academic economists surveyed said it was “somewhat” or “very” likely the Fed would completely stop its bond purchases by the end of March.  That pace could enable the Fed to raise its benchmark fed funds interest rate as early as the first quarter of next year, a move that 10% of the respondents now expect.

U.S. Labor Market:  One little-noticed factor that may be helping to drive up wage rates is the aggressive pay policies and rapid hiring at Amazon (AMZN, $3,523.29).  As the company establishes ever more warehouse and distribution operations across the nation, often in smaller communities with low wage rates, its relatively high pay is forcing local firms to hike their pay to avoid losing workers.

China:  Several government agencies are reportedly developing a blacklist of startup companies in sensitive economic sectors that will be restricted from using “variable interest entities” to raise foreign capital and list on overseas stock markets.  The targeted sectors would likely include those that are data-intensive or have implications for national security.  The list would exclude big, well-established firms, which have used the VIE structure to list in the U.S. and other foreign markets for decades.

• One Chinese official indicated the blacklist is aimed at ensuring that future national champions critical to the country’s economy would not be dominated by foreign shareholders.
• The official said that while foreign investors may be restricted from investing in Chinese technology companies, they could still invest in traditional firms, which don’t need to use the VIE structure to list overseas.
• News of the limited blacklist is consistent with statements a Chinese official made last weekend, which indicated that the country is not issuing a general ban on VIEs listing overseas or pushing to delist existing VIEs overseas.
• If confirmed, the reliance on a limited blacklist could offer some clarity on the status of existing Chinese listings on the U.S. and other Western exchanges, which could give a boost to those listings.  However, given the worsening U.S.-China geopolitical rivalry, there would still be some risk that Chinese authorities could expand the blacklist over time and/or still put informal pressure on Chinese firms to bring their listings back home to China or Hong Kong.  Besides, as the geopolitical rivalry heats up and U.S. officials increasingly see China as a threat, they are likely to keep pursuing their own restrictions on U.S. investment in China.

Australia-China:  Just days after the U.S. said it would impose a diplomatic boycott on the upcoming Winter Olympic Games in Beijing, the Australian government announced it would impose its own diplomatic boycott over China’s geopolitical aggression and human rights abuses.  The move seems certain to draw Chinese ire and possibly new economic and diplomatic punishments for Australia.

Germany:  The Bundestag today approved Olaf Scholz as the country’s new prime minister.  Scholz will lead a coalition government consisting of his center-left Social Democratic Party, the leftist Green Party, and the libertarian Free Democratic Party.

• As referenced above, the new government is likely to ally more closely with the U.S. as it tries to counter aggressive geopolitical moves from Russia and China.  In domestic policy, the coalition partners have agreed on a four-year program to overhaul Germany’s economy, fight climate change, digitize public services, and reverse its demographic decline.
• For now, the coalition partners have what appears to be a workable agreement, and investors are likely to appreciate continuing stability in Germany.  The installation of Free Democratic politician Christian Lindner will also probably be taken well by investors.  However, given the wide differences in the coalition partners’ policy aims, Scholz will likely face a tough balancing act to keep the partners together, meaning the current aura of stability and cooperation may not last.

COVID-19:  Official data show confirmed cases have risen to 267,322,517 worldwide, with 5,275,023 deaths.  In the U.S., confirmed cases rose to 49,389,503, with 791,514 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 236,363,835.  The data show that 71.2% of the U.S. population has now received at least one dose of a vaccine, and 60.1% of the population is fully vaccinated. 

• Pfizer (PFE, $51.72) and BioNTech (BNTX, $302.69) said initial lab tests indicate that a third dose of their vaccine offers good protection against the Omicron mutation, even though a two-dose regime is significantly less effective against the new variant.
  • However, the companies said a two-dose regime may still induce protection against severe disease, and they are continuing to monitor the real-world effectiveness against Omicron.
  • The findings by Pfizer and BioNTech are generally consistent with an independent analysis published yesterday by scientists in South Africa.
  • Pfizer also said it was developing a new vaccine specifically targeting Omicron and expected to have it available by March if additional protection is required to combat the variant.
• In the U.K., Prime Minister Johnson is set to announce fresh restrictions to curb the spread of the Omicron variant, including requiring vaccine passports to enter large venues and an order to work from home. The move comes as Omicron spreads rapidly in the U.K., and the government faces a scandal over a Downing Street holiday party last year.  In response, the pound has dropped about 0.5% to approximately $1.3170 today, reaching its lowest level in more than a year.

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