by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with an update on the post-pandemic landscape in China, where the relaxation of pandemic lockdowns continues to reverberate throughout the domestic, regional, and global economies.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including the weekend’s big capital riot in Brazil and the election of Kevin McCarthy as Speaker of the House.

China Reopening:  As of Sunday, the Chinese government has removed most of its COVID-19 restrictions on international travel, prompting tens of thousands of air arrivals and departures.  The move could eventually help the tourism industry in countries that had become dependent on Chinese visitors before the pandemic, especially in Asia, but outbound Chinese tourism won’t immediately rise to its pre-pandemic levels given that many foreign countries have slapped testing requirements on them to keep China’s surging infections from spreading.  It may also take the airlines some time to re-orient their fleets toward China again.

• Separately, the reopening of the economy appears to be boosting global oil prices today, even though the relaxation of pandemic lockdowns has led to a current surge in infections and is actually crimping current economic activity.
• So far this morning, front-month Brent crude oil futures are trading up some 2.9% at $80.82 per barrel.

China Regulatory Policy:  The China Securities Regulatory Commission is reportedly preparing to cease allowing local companies in certain sectors to list on the Shanghai or Shenzhen stock exchanges so that the government can channel funding into strategic industries.  The sectors to be “red lighted” will reportedly include food and beverage chains and COVID-19 testing firms.  The CSRC will also name a number of “yellow light” sectors, such as apparel and furniture, where initial public offering requests could come under heavy scrutiny if their growth relies heavily on debt for expansion.

• Over the last few years, the government has clamped down hard on big economic sectors that leaders felt had become too powerful, wasteful, or simply at odds with President Xi’s vision of good communist values. The real estate development, information technology, and on-line tutoring industries were prime targets, and their investors paid a heavy price.
• The new red-light and yellow-light rules mark a further blow to China’s free markets. In turn, they will likely contribute to rising investor skepticism about China and could potentially drive more foreign investors elsewhere.

Russia-Ukraine War:  Fighting continues along the front lines running from eastern to southern Ukraine, with the Russian military continuing to stage air attacks against critical Ukrainian energy infrastructure.  To sustain its air attacks even as it has depleted much of its own conventional and advanced missiles and artillery, Russian officials say they are about to begin domestic production of Iranian-designed kamikaze drones.

• Separately, a new Atlantic Council survey found that 46% of the 167 foreign policy analysts polled thought that Russia could become a failed state or break up by 2033.
• Also in the survey, 40% pointed to Russia as a country they expected to break up for reasons including “revolution, civil war or political disintegration” over that time.

NATO Expansion:  Swedish Prime Minister Kristersson warned that his government can’t meet some of the demands Turkey is making before it would lift its veto over Sweden entering the North Atlantic Treaty Organization.  Turkey’s demands focus on Sweden’s alleged ties to Kurdish separatists in Turkey.  It is not clear whether Ankara will finally acquiesce to Sweden and Finland joining NATO after Turkey’s presidential elections sometime in the coming months.

France:  After abandoning his first effort to reform the country’s pension system due to the COVID-19 pandemic, tomorrow President Macron plans to propose a new reform that would increase the minimum pension but raise the age at which retirees can get the full benefit.  The aim is to cut the massive fiscal cost of the country’s pension system and boost the incentive to work.  However, most French voters object to the proposed reforms, and labor leaders have threatened a series of strikes to oppose them.

United Kingdom:  As the country continues to reel from economically damaging work stoppages across the railroad and healthcare sectors, Prime Minister Sunak’s government is planning to meet union leaders today in an effort to avert further strikes.  Of great importance is a threatened teachers’ strike.  Since the beginning of the year, Sunak has somewhat moderated his stance toward the strikers, although he still insists he will keep any resolution of the strikes from overly burdening the government’s budget or further boosting inflation.

Brazil:  Thousands of supporters of the country’s right-wing former president, Jair Bolsonaro, stormed the presidential palace, national parliament, and supreme court buildings yesterday and demanded that the military remove newly inaugurated leftist President Lula da Silva, who beat Bolsonaro in the October presidential elections by 51% to 49%.  Bolsonaro has refused to concede defeat in the elections, but the military, so far, has not shown signs that it supports his argument that the elections were marred by fraud.

• Bolsonaro has decamped to Florida, as has his former justice minister, who had been named as the federal district’s public security chief.
• The presence of both Bolsonaro and the federal district’s public security chief in Florida will likely raise concerns that the storming of the capitol was preplanned and that the two men left the country in an effort to distance themselves from the action. However, Bolsonaro eventually condemned the rioting and claimed no connection with it.
• In any case, the storming will likely raise concern about the resilience of Brazil’s democracy. Investors certainly have concerns about the leftist president’s economic policies, but political instability would add to the headwinds for Brazil’s stock market.

U.S. Congressional Politics:  The new Republican majority in the House of Representatives finally elected Rep. Kevin McCarthy as Speaker of the House early Saturday morning, but only after he made a series of concessions to far-right wing members of his party that will leave him severely weakened.  The 15 rounds of voting needed to elect McCarthy as well as his compromises are widely being panned as another sign that political polarization is leaving the U.S. ungovernable.

U.S. Monetary Policy:  At a conference on Friday, Richmond FRB President Barkin warned that the Federal Reserve is likely to continue raising interest rates because its mandate to control inflation will trump the risk of causing a recession.  The statement marks a further Fed effort to keep business leaders cautious even though some investors and analysts are already looking for a potential monetary loosening.

U.S. Weather and Drought:  California is preparing for yet another major rain and snow storm today, but scientists warn that the recent torrents aren’t nearly enough to end the state’s drought.  Continued water-use restrictions are therefore likely to continue weighing on California’s economy.

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