Daily Comment (August 4, 2022)

Posted on August 4, 2022August 4, 2022 by Amanda Ahne

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Today’s Comment begins with a discussion on the central banks’ decision to raise rates despite slowing economic growth. Next, we examine how rising geopolitical risks make it more difficult for firms to rebuild their supply chains. We end the report with an update on the climate and drug bill.

Monetary Policy: Central banks in the U.S., U.K. and the Eurozone appear to be plowing ahead with tighter monetary policy even as their economies slow.

Fed officials downplayed expectations that the central bank was close to ending its tightening cycle. Despite the disappointing economic data, regional Fed Presidents Neel Kashkari and Thomas Barkin dismissed speculation that the Fed was finished raising rates and warned of a possible recession. Meanwhile, St. Louis Fed President James Bullard, a voting member, insisted that the central bank must front load big rate hikes to cool inflation. Additionally, he revealed his desire for the Fed’s policy rate to be between 3.75% and 4.00% by the end of the year.
To keep pace with the Federal Reserve, the Bank of England raised its benchmark rate by 50 bps on Thursday. Although the increase is less than the Fed’s 75 bps hike in July, the rate rise was the country’s largest in 27 years. By increasing its policy rate, the BOE aims to prevents the pound from depreciating against the dollar and exacerbating the country’s inflation problem. The BOE warned that the country is expected to fall into a recession and that inflation could rise as high as 13%.
The European Central Bank appears to have used funds from maturing bonds in the portfolio of its pandemic program to purchase the debt of southern European economies. The data showed that the bank’s net holdings of German, French, and Dutch bonds dropped by 18.9 billion euros in July. In the same month, statistics showed that the bank made 17.3 billion euros of net debt purchases from Italy, Spain, Portugal, and Greece. The central bank’s intervention suggests it will also aggressively raise rates in its next meeting.
- Fitch Ratings Agency expects that the ECB’s new anti-fragmentation tool will allow the bank to raise rates while reducing debt sustainability risk. Fitch Ratings is one of the three most respected credit rating agencies. Thus, its analysis will likely help reassure investors that the ECB has a credible tool to fight fragmentation.

Strong U.S. economic growth and tight monetary policy have pushed the euro and British pound to near multi-decade lows against the dollar. The depreciation of the euro and pound have contributed to the inflation problem in their respective regions as it makes dollar-priced commodity imports more expensive. Unfortunately, neither the EU nor U.K. economies have expanded at the same rate as the U.S. since the pandemic started in 2020. As a result, they likely have less flexibility in raising rates. Although all three regions have elevated recession risks, the EU and U.K. are in a worse position than the U.S.

Geopolitical Risks: As the calls for a ceasefire in the Ukraine-Russia war become increasingly louder, conflicts in other parts of the world are becoming more noticeable, making it difficult for firms to return to pre-pandemic normalcy.

European leaders are now pushing Ukraine to engage in ceasefire talks with Russia. On Wednesday, former German Chancellor Gerhard Schröder urged Kyiv to negotiate with Russia to end the conflict and modify its demands. Meanwhile, the Irish president and his wife stirred controversy after the first lady posted a letter on the presidential website pleading for world leaders to encourage ceasefire talks. The push by Putin’s allies within Europe is evidence that the conflict may be headed toward a pause. Ukrainian President Volodymyr Zelensky has also sought a meeting with Chinese President Xi Jinping to help negotiate an end to the contest. However, Xi has not replied to any of his requests to talk.
- Although the possible end of the conflict is good news, it is foolhardy to assume that the relationship between Europe and Russia will return to normal. Russia’s weaponization of its natural resources will mean Europe will still need to reduce its dependence on Russia significantly. Meanwhile, Russia’s limited ability to deliver its natural gas to countries outside of Europe suggests it also needs to invest in building its pipeline capacity to new regions. Figuring out how to remove sanctions is another can of worms no one in the West wants to open. Although it is too early to determine whether the conflict will end soon, the path toward de-escalation is forming.
- The U.S. and Italy has passed legislation that will allow Sweden and Finland to enter NATO.
As the U.S. gears up for another round of nuclear talks, there is speculation that Iran might direct its proxies to attack American and partner targets in the region. Such an attack could lead to a crisis in the Middle East and push up the price of commodities like oil. Iran blames NATO for the recent unrest in Iraq. Over the weekend, protesters stormed the Iraqi parliament to demand new parliamentary elections. The rising tension between the West and Iran suggest that the Middle East remains politically unstable.
China engaged in more military drills around the Taiwanese peninsula the day after U.S. Speaker of the House Nancy Pelosi visited the self-ruled island. In China’s most immense provocation in 16 years, its military launched several missiles into Taiwanese waters. The drills are expected to continue until Sunday. However, possible escalation cannot be ruled out. China is in a difficult bind. Pelosi’s visit undermines Beijing’s argument that the U.S. views it as a threat. Meanwhile, U.S. politicians on both sides of the aisle are pushing for Washington to take a tougher stance against China. As a result, we believe that the risk of possible miscalculation leading to direct conflict is elevated.
- The White House is attempting to rein in Congress after Pelosi’s trip to Taiwan has encouraged politicians to flex their toughness on China’s credentials going into the mid-terms. The Senate is currently working on legislation that would designate the sovereign island as a major non-NATO ally.

One of the trends that we are noticing is that the world is becoming increasingly hostile. Rising global tensions will make it difficult to repair supply chains and could accelerate U.S. firms’ withdrawals from the rest of the world. This shift from relying on global supply chains in emerging markets will be expensive in the short term as firms look to adjust to this new normal.

Biden’s Agenda: The U.S. Senate is expected to pass the Inflation Reduction Act. The bill aims to raise corporate taxes and may negatively impact corporate earnings.

Arizona Senator Kyrsten Sinema (D-AZ) is pushing for changes in the bill before backing it. She is a pivotal vote in getting the legislation through the Senate. She has concerns about the changes to the corporate minimum tax and has hinted at possible opposition to a carried interest tax. Additionally, she favors beefing up the amount of funding for the climate and energy portions of the bills.
The Congressional Budget Office forecasts that the bill will reduce the deficit by a net $101.5 billion over the next decade. However, the CBO’s estimate did not include the $204 billion tax revenue gain from the increased Internal Revenue Service enforcement. The analysis is key to getting the bill passed as Democrats are trying to make themselves look more fiscally responsible after the initial stimulus package contributed to a surge in inflation.

The new bill from the Democrats is austerity disguised as fiscal stimulus. The trend of reducing the government deficit will likely be a central theme going into mid-terms and could continue afterward. The lack of government spending will lead to slower economic growth.

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Weekly Energy Update (August 4, 2022)

Posted on August 4, 2022December 13, 2022 by Amanda Ahne

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

Prices are testing long-term support near $90 per barrel for crude oil.

(Source: Barchart.com)

Crude oil inventories rose 4.5 mb compared to a 1.5 mb draw forecast. The SPR declined 4.7 mb, meaning the net draw was 0.2 mb.

In the details, U.S. crude oil production was steady at 12.1 mbpd. Exports fell 1.0 mb, while imports rose 1.2 mbpd. Refining activity declined 1.2% to 91.0% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories. Clearly, this year is deviating from the normal path of commercial inventory levels. The fact that we are not seeing the usual seasonal decline is a bearish factor for oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.

Total stockpiles peaked in 2017 and are now at levels last seen in 2004. Using total stocks since 2015, fair value is $104.04.

With so many crosscurrents in the oil markets, we are beginning to see some degree of normalization. The inventory/EUR model suggests oil prices should be around $65 per barrel, so we are seeing about $30 of risk premium in the market.

Gasoline Prices

One of the challenges in determining “how high” gasoline prices truly are is to find the proper scaling variable. The most common metric is to deflate the current price by some price index. Although that method is sound (it compares gasoline prices to other items), it doesn’t, in our opinion, capture the centrality of gasoline prices. After all, a commuter often has limited ability to substitute either a fuel (cars tend to only use gasoline) or a travel method (car sharing requires coordination, public transportation varies by locale).

As an alternative to using a price index, we take the nominal hourly wage for a non-supervisory worker and divide into that wage the current average national price of gasoline. This measure calculates how many gallons of gasoline a worker can purchase for an hour’s worth of work. The scaling method isn’t perfect as it doesn’t take into account taxes and benefit costs, for example, but it does allow us to compare the current price to history.

The below chart shows that calculation along with the Presidential Approval Ratings. On the left axis, the higher the number, the more gallons one can buy with an hour’s worth of work. So, the higher the reading, the better off the worker is. Over time, the average is 8.6 gallons. As the chart shows, we are well below that level at present. It’s also clear that Presidential Approval Ratings and the number of gallons one can buy “rhyme.” The two variables are not perfectly correlated. There are several spikes in approval tied to wars or other geopolitical events that sometimes occur with lower gallon per hour readings. But, overall, President Biden’s low approval ratings is not being helped by falling gallon per hour numbers.

Market news:

The current energy crisis has a multitude of factors behind it. Green power hasn’t come online as fast as hoped, and fossil fuel production has not responded to higher prices for a number of reasons. This article provides a summary, and this podcast, from Odd Lots, highlights the differences between consumer goods (especially technology) and energy products. With consumer tech, when a better product hits the market, the old technology disappears rapidly. That is not the case with energy.
OPEC+ met this week to set production targets. The cartel agreed to a cosmetic increase of 0.1 mbpd, which fulfills the White House’s goal of an increase, but will not have any significant impact on supply.
It appears the EU is rethinking its stance on banning insurance firms from selling protection on Russian crude oil shipments. The U.S. has been concerned for some time that the program could unexpectedly reduce sales and drive oil prices higher. The G-7 is considering other measures to reduce the profitability of Russian crude oil without curtailing supply.
As it has become apparent that Russia is an unreliable supplier of natural gas, Germany is moving rapidly to build LNG regassification capacity.
In light of the energy crisis, coal has made a dramatic recovery, with global demand set to have a record high in 2022. The EU is reducing Russian purchases on its way to an outright ban.
West Virginia has banned five major Wall Street banks from doing business with the state over their policies toward lending to fossil fuel companies.
In periods of shortages, nations often turn to hoarding. For energy producers, the temptation is to reduce exports in order to provide oil, natural gas, or coal at lower prices domestically. Bans can be hard to enforce, and after such actions consuming nations often become hoarders themselves, stockpiling due to the insecurity of supply. When that happens, the relationship between inventory levels and price becomes positive while under normal circumstances, the relationship is negative. So far in oil, that correlation inversion hasn’t occurred yet. We note that Australia is considering mandating a reduction in coal exports, which may be an early warning of hoarding activity. In addition, Australia’s LNG exports might be curtailed to ensure domestic prices remain below global ones.
Russian LNG supplies to India have been cut, forcing India to ration gas by cutting supplies to industrial users.
- We also note that Russia has signaled to Germany that repairs on Nord Stream 1 are not its responsibility.
- France claims it will have fully filled its natural gas inventories by November 1.
Demand for hydraulic fracking equipment has been strong, which is leading to constrained supply. The lack of equipment could prevent oil production from rising.
Power companies report a shortage of key distribution equipment as hurricane season heads into its active period.
Baker/Hughes (BKR, $25.50) is selling its Russian business unit to a local management team.

Geopolitical news:

Protestors have stormed the Iraqi Parliament twice recently, due to anger over the potential for a government run by groups other than Moqtada al-Sadr. They are especially upset by the candidacy of Mohammed al-Sudani, who is backed by Iran. The protestors are also calling for a new constitution. The worry is that if the political unrest escalates, it might disrupt oil production at some point.
Although Iran is pressing to resume JCPOA talks, U.S. officials suggest a deal is “highly unlikely.” Meanwhile, the U.S. is considering expanding sanctions against the smuggling network that is selling Iranian crude oil.
- Iran is trying to improve relations with India, but is struggling to make progress.
OPEC+ is showing no signs of ending Russia’s membership.
When a company makes direct investment into a foreign nation, the risk of expropriation exists. Miners are facing such a threat in Kyrgyzstan.

Alternative energy/policy news:

The “big news” this week was the unexpected agreement between the Democrat leadership in Congress and Sen. Manchin (D-WV) on climate regulation. Although this bill isn’t as ambitious as earlier versions (which Manchin opposed) it is surprisingly expansive. It includes clean energy tax credits for nuclear power, clean hydrogen, and direct carbon capture. Incentives to buy EVs, including tax credits, were included, as were aids for solar power. There are some sticks, too. These include a fee on methane emissions, which could boost the cost of drilling, especially for natural gas. There are also taxes for oil imports. We doubt this bill will get any support from the GOP and it isn’t completely clear it will get unanimous Democratic support. But for now, the agreement is something of a breakthrough, and we will be watching to see if it actually passes.
- We are also closely watching another bill that can’t go through reconciliation but would streamline the permitting process for oil and gas drilling along with pipeline construction. While permitting delays have been a favorite tactic of environmentalists, this bill would put a two-year limit on objections, meaning that the project either get approved or rejected in a shorter time frame. This bill could be filibustered, so it must gain some GOP support.
- Another interesting sidelight is that the bill offers tax incentives for making EVs using minerals from nations with which the U.S. has free trade agreements. Sadly, there aren’t any.
Even with the aforementioned bill, EVs continue to struggle for adoption. Prices are high since the market for low cost EVs is still rather small. The majority of EVs reside in a handful of states.
Last week, we noted the unusual weather events we were seeing across the country. It is clear (especially in St. Louis and vicinity) that the infrastructure isn’t adequate for such events. Hot weather continues across the country with some 100 million Americans affected. Although the notion of climate change remains polarized, polling does suggest that unusual weather events are increasingly being tied, in the mind of the public, to climate change.
- As temperatures rise in Singapore, the city-state is investigating various methods to manage heat.
Farming is a source of greenhouse gases; steers and dairy cows emit CO₂, for example. At the same time, they are a source of food. Taking steps to curtail agriculturally based gases will raise food costs – a step that is rarely politically popular. The Netherlands and Canada are considering such steps, triggering a backlash from farmers. Given soaring food prices, these steps appear rather mistimed.
Lyondell (LYB, $86.50) is closing a refinery in Texas, but is considering repurposing it to process recycled plastic.
German automakers are turning to China’s Contemporary Amperex Technology (CATL, ¥534.92) for auto batteries for EVs.
- Ganfeng Lithium (GNENF, $9.32) is planning to build a solid state EV battery facility. Solid state batteries hold the promise of longer range and faster recharging.
Is sand a viable, cheap, alternative to other batteries for utilities? Finnish researchers are testing the concept. The idea is that sand can hold heat and that heat can be tapped for a number of different applications.
S. regulators have certified a small nuclear design.
Under hot and dry conditions, wind can falter. Texas is reporting a drop in renewables output, further constraining electricity supply. Interestingly enough, hot weather can also curtail nuclear power. In France, as temperatures rise, river water used to cool reactors becomes too hot, forcing utilities to restrict output.
- Warm weather is also lowering the water level of the Rhine River, nearly closing it to shipping. If it closes, coal shipments might be adversely affected.
New England utilities are finding that expanding solar capacity is reducing demand during daylight hours.
Aurora Hydrogen, a startup, is testing the concept of making hydrogen from natural gas with a process that generates no CO₂.

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Daily Comment (August 3, 2022)

Posted on August 3, 2022August 3, 2022 by Amanda Ahne

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, including a revelation that President Biden has personally threatened Chinese President Xi with trade restrictions if China helps Russia with its invasion. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, with a specific focus on House Speaker Pelosi’s now-completed trip to Taiwan and its impact on U.S.-China relations.

Russia-Ukraine: Russian forces continue to make small territorial gains around Ukraine’s northeastern Donbas region while shifting some troops to defend against the Ukrainians’ counteroffensive against the occupied southern city of Kherson. Officials in Moscow have also ramped up their false claims of destroying multiple HIMARs systems and other weapons provided by the West, most likely in an effort to thwart rising exasperation from Russian military bloggers. Not only have the Western weapons discouraged those bloggers and other Kremlin supporters, but Western intelligence analysis believe they are also causing significant casualties among Russian troops. Other reports say Iran has provided its first batch of military drones to Russia for field testing.

In a New York Times opinion article, foreign affairs author Thomas Friedman revealed that President Biden personally threatened Chinese President Xi with a ban on Chinese exports to the U.S. and Europe if China provided help to Russia in its invasion of Ukraine. According to Friedman, the threat has been instrumental in preventing China from providing new arms or other assistance to Russia in the war. However, he now fears that House Speaker Pelosi’s visit to Taiwan this week will prompt Beijing to help the Russians out of retaliation.
On the economic front, German Chancellor Scholz endorsed the idea of extending the life of Germany’s last three nuclear-generating stations to help cushion the blow from Russia’s reduced energy exports to Western Europe. The plants, which are scheduled to be retired at the end of 2022, produce only a small portion of the country’s electricity, but even that would be valuable to Russia-dependent Germany in the event of a fuller cut-off in Russian natural gas supplies.

United States-Taiwan-China: Undeterred by China’s threats and President Biden’s misgivings, yesterday House Speaker Pelosi landed in Taiwan on a trip designed to underscore the U.S.’s support for the island democracy. Pelosi’s trip, which included a long, circuitous route from Kuala Lumpur across Borneo and around the Philippines to avoid flying over Chinese military facilities in the South China Sea, immediately spurred a series of protests by Beijing. The Chinese government also sent more fighter aircraft into the Taiwan Strait and announced further live-fire military exercises in the six zones surrounding the island. China also temporarily halted most food imports from Taiwan.

As of this writing, China’s response to the Pelosi visit has been tough and high-profile, but not necessarily over-the-top. However, the full extent of the retaliation may not be known for days or even weeks. One concern is that China has told commercial ships and air carriers to stay out of its six military-exercise zones surrounding Taiwan. If kept in place, those no-sail/no-fly zones could become a soft blockade on the island, potentially threatening to strangle it.
On Pelosi’s side, we’ve noticed that there’s been little explanation as to why she chose to make such a provocative trip right now. One obvious explanation would be to show the Democratic Party is just as tough on China as the Republican Party. Thwarting China’s geopolitical aggressiveness is now a solidly bipartisan effort in the U.S., but Pelosi may have wanted to underscore the Democrats’ anti-China credentials just two months before the mid-term elections. Besides, Pelosi knows that the impact of her trip would be greatest if she is still Speaker, a position she will give up in just a few months if the Democrats lose control of the House as expected.

United States-China: Illustrating how political and economic considerations continue to fracture the world into relatively separate blocs, the recently-passed U.S. Chips and Science Act is already prompting major foreign technology firms to consider abandoning their investments in China in favor of closer ties with the U.S., as intended.

Until now, reporting on the Chips and Science Act has focused on its $52 billion in subsidies to encourage investment in advanced computer chip factories in the U.S., as well as hundreds of billions of dollars in other science and technology funding. Less noticed, however, is that the bill also contains qualified “guardrails” prohibiting recipients of the funds from expanding or upgrading their advanced chip capacity in China for 10 years.
Reporting in the Financial Times today says South Korean semiconductor producers Samsung Electronics (005930.KS, ₩61,300.00) and SK Hynix (000650.KS, ₩97,500.00) are re-evaluating their operations in China and may abandon them so as not to run afoul of the guardrails in the U.S. legislation.

U.S. Monetary Policy: Yesterday, a slew of regional Federal Reserve presidents made statements suggesting that the policymakers intend to keep hiking interest rates aggressively, despite recent investor expectations that they might soon pivot to rate cuts as recession risks grow. The statements pushed up bond yields yesterday, and those yield increases are continuing so far this morning. In the statements:

Chicago FRB President Evans said he expects the Fed to hike its benchmark short-term interest rate by 50 bps at its next meeting in September but wouldn’t rule out another big 75 bps hike if inflation doesn’t look like it’s receding. After that, Evans said he hoped the Fed could return to the more traditional 25 bps hike at the last two policy meetings of 2022.
Separately, Cleveland FRB President Mester warned against prematurely declaring victory over inflation. According to Mester, the Fed should keep hiking rates until it sees several months of cooling inflation.
Finally, San Francisco Fed President Mary Daly said the central bank’s effort to bring down prices by slowing demand was nowhere near done. Moreover, she poured cold water on the idea that the Fed could pivot to rate cuts next year, saying the next change would likely be to just hold rates steady for an extended period.

U.S. Retail Gasoline Market: According to data provider OPIS, the average price for a gallon of regular unleaded gasoline sank to $4.19 yesterday, marking the 49th straight day that gas costs have declined in the U.S. Prices are now down 16.5% from their most recent high of $5.02 per gallon on June 14.

Global Energy Markets: The Organization of the Petroleum Exporting Countries and its allies today agreed on a modest boost in crude oil production. Beginning in September, the OPEC+ members said they will boost output by a collective 100,000 bpd, on top of the increase of 648,000 bpd previously announced for July and August.

The small boost is probably at least a partial response to President Biden’s controversial rapprochement with Saudi Arabian Crown Prince Muhammed Bin Salman.
However, the small increase is expected to have little impact in bringing down prices. The recent price declines for oil can be tied more tightly to factors like demand destruction from the high prices earlier in the summer and slowing demand growth as economies respond to interest-rate hikes by the world’s central banks.

Global Cryptocurrency Markets: In yet another blow to the budding cryptocurrency markets, an apparent cyberattack drained thousands of digital wallets linked to the Solana blockchain. Along with recent crypto frauds, bankruptcies, and other scandals, cyber thefts like the one at Solana will undermine digital currency promoters’ assertions about the assets being secure, even as the digital currencies face growing regulatory risk.

In fact, the Senate Agriculture Committee’s top Democratic and Republican leaders plan to introduce a bill that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class.
The proposed legislation would target CFTC regulation over the two largest cryptocurrencies: bitcoin and ether.

Netherlands: As the country breaches its legal limits on nitrogen emissions, the government has sparked broad farmer protests with a plan to reduce Dutch livestock populations by one-third through buyouts and other incentives. Since June, the farmers’ protests have included picketing supermarket distribution centers, blockading roads, airports, and train stations, and even dumping slurry at the home of the minister in charge of the program.

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Daily Comment (August 2, 2022)

Posted on August 2, 2022August 2, 2022 by Amanda Ahne

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 Russia continues to struggle with insufficient troop levels to make more significant territorial gains or to better defend against Ukraine’s counteroffensive in the south of the country. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, with a particular emphasis on U.S. House Speaker Pelosi’s visit to Taiwan and China’s risky saber-rattling in response to it.

Russia-Ukraine: As Ukrainian forces ramp up their counteroffensive against the occupied southern city of Kherson, the Russians continue to shift troops there from the areas they occupy in Ukraine’s northeastern Donbas region. However, the Russians’ effort to reinforce Kherson may deprive them of the combat power they need to make further gains in the Donbas. The shift may also tempt the Ukrainians to launch a separate counteroffensive against the weakened Russian defenders in the Donbas. Meanwhile, the Russians continue to launch missile strikes across a wide swath of Ukrainian territory.

The Russian military’s need to shift troops from one battlefield to the other illustrates its continuing shortfall in troops. In further evidence of that, U.S. and British military officials said that the Russian mercenary force known as the Wagner Group has been pulling troops out of Africa and redeploying them as regular Russian army units in Ukraine.
Separately, imagery and other analysis increasingly suggest that the Russian military was responsible for an explosion that killed more than 50 Ukrainian prisoners of war at a Russian-occupied prison over the weekend. The Russian government had suggested that the Ukrainian military used precision rockets and artillery provided by the West to kill the POWs and prevent defections, but it now appears that the Russians staged the explosion and killed the POWs in yet another Russian violation of the Geneva Convention.
On the economic front, the Ukrainian infrastructure minister warned that the country’s grain exports will take a long time to ramp up, despite yesterday’s first successful shipment from Odessa since the war began. The warning means Ukrainian supplies won’t quickly help alleviate the evolving global food crisis.

United States-Taiwan-China: It now appears that House Speaker Pelosi intends to carry out her controversial visit to Taiwan today and tomorrow, despite strong but unspecified Chinese warnings not to do so and President Biden’s misgivings about the trip. At this point, it’s not clear whether China’s warnings amount to anything more than posturing and bluster. However, given that the country is much more powerful than when a House speaker last visited the island in 1997, it’s impossible to rule out a risky show of force that could lead to miscalculation and potential conflict. That possibility is weighing on risk assets so far this morning.

In what is probably part of China’s response, this morning, Chinese fighter aircraft have buzzed the maritime boundary between the mainland and Taiwan.
On social media, we’ve also seen video of tanks patrolling a beach in China’s southern Xiamen province, opposite Taiwan. Of course, there seems to be little reason for Chinese tanks to be patrolling their own beaches (and disrupting tourists playing in the surf). Most likely, the move aims to drive home the idea of the Chinese military attacking Taiwan’s beaches.
The People’s Liberation Army has put its Southern Theater Command on high alert and launched a series of military exercises in the South China Sea set to last until Saturday evening. That makes sense, given that the Southern Theater Command has responsibility for the area off China’s southeast coast where Pelosi’s plane would likely travel enroute from Malaysia to Taiwan. However, other than the tanks on the beach in Xiamen and reports of closed airspace around Fujian, we have seen no indication of any change in alert status for the Eastern Theater Command, which sits opposite Taiwan and would have key responsibility for any action against the island.

Source: U.S. Department of Defense

Japan: Continuing its rebound since mid-July, the yen has now appreciated to a two-month high of about 131.00 per dollar. The rebound reflects factors such as the recent retreat in U.S. bond yields and calculations that the Bank of Japan could abandon its yield curve control policy as other major central banks accelerate their interest-rate hikes to fight inflation. The move also appears to reflect some safe-haven buying amid geopolitical tensions and global recession fears, as well as short-covering by major investors.

Bulgaria: President Radev has called a snap election for October 2 and appointed Galab Donev, a former labor minister, to lead a caretaker government until a new administration is formed. The new election (the country’s fourth in the last two years) comes after the June collapse of the government run by Kiril Petkov, who came into office promising to fight the country’s rampant corruption, and who took an unusually strong line against Russia following the invasion of Ukraine.

Petkov’s government lost a vote of confidence after one of the parties in the fragile four-party coalition abruptly pulled the plug. Afterwards, no other political group was able to secure a majority to govern.
Observers now fear that the snap election could produce another fractured parliament, potentially undermining the European Union’s support for Ukraine in the war.

Global Cryptocurrencies: The Securities and Exchange Commission has charged 11 people for a $300-million cryptocurrency pyramid scheme in which they used promoters to convince millions of investors worldwide to recruit others into the program. Besides reflecting increased enforcement efforts by national authorities, the news is another black eye for the industry and will likely buttress calls for increased regulation.

U.S. War on Terror: President Biden announced that a U.S. airstrike in Kabul, Afghanistan, killed Al Qaeda leader Ayman al Zawahiri, a founding member of the movement and one of the key strategists behind its international campaign of terror that culminated in the September 11 attacks. The strike was the U.S.’s first known counterterrorism operation in Afghanistan since it withdrew its forces last summer. The attack shows that the U.S. retains the capability of striking terrorists in Afghanistan despite not having a permanent presence there.

U.S. Bond Market: For the first time in this cycle, the yield on the three-month Treasury bill briefly rose above the yield on the 10-year note yesterday. While the 2-year/10-year yield curve has been inverted for some time, Fed researchers consider the 3-month/10-year to be the better indicator of an impending recession. The development will help keep investor concerns alive concerning a recession in the U.S. sometime over the next year or so.

U.S. Antitrust Policy: The trial over the Justice Department’s effort to block a merger of major publishers has started. The lawsuit, in which the DOJ is attempting to stop Penguin Random House’s planned acquisition of rival publisher Simon & Schuster, is expected to signal how successful the government will be in preventing industry consolidation and preserving market competition in the coming years.

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Bi-Weekly Geopolitical Report – Political Crises for Top U.S. Allies (August 1, 2022)

Posted on August 1, 2022July 29, 2022 by Amanda Ahne

by Patrick Fearon-Hernandez, CFA | PDF

It’s been a hot summer for some of the United States’ key allies, and we don’t just mean the weather. We’ve seen a major political assassination in Japan, the scandal-driven ouster of a prime minister in the United Kingdom, and a failed vote of confidence that led to the resignation of the prime minister in Italy. Since all these political crises happened in such a short amount of time, we decided to explain each of them in this report and discuss their common features and geopolitical implications. As always, we end with a discussion of the ramifications for investors.

View the full report

Don’t miss the accompanying Geopolitical Podcast, available on our website and most podcast platforms: Apple | Spotify | Google

Daily Comment (August 1, 2022)

Posted on August 1, 2022August 1, 2022 by Amanda Ahne

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, including details on the first shipment of grain from a Ukrainian port under the recent Turkish-brokered deal for safe passage of food exports from the country. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today.

Russia-Ukraine: With Ukrainian forces apparently ramping up their counteroffensive against Russian occupiers in the southern Ukrainian city of Kherson, leaders in Moscow continue to face the dilemma of whether to transfer troops from the occupied Donbas region to reinforce the city. The latest reporting suggests that the Russians may be trying to squirm out of that dilemma by launching new attacks from the Donbas region westward toward the major Ukrainian city of Kharkiv. That attack has the potential to draw Ukrainian forces northward to help defend it, weakening their attacks on Kherson, but it is not at all clear whether the Russians have enough resources to truly threaten Kharkiv and draw the Ukrainians into that battle.

To the surprise of many who thought Moscow would scuttle the recent Turkish-brokered deal to allow safe passage for Ukrainian grain shipments, today a Sierra Leone-flagged bulk carrier left Odessa with 26,000 metric tons of corn headed toward Lebanon. More ships are expected to depart in the coming days, including many which were loaded before the Russian invasion began in February.
- The flow of Ukrainian wheat, corn, barley, and other food products, which mostly go to less-developed countries, has helped push grain prices lower so far today.
- Nevertheless, it is still too early to know whether Moscow will allow continued shipments. The renewed exports, therefore, may not have a significant impact on global markets in the near term.
Separately, tensions between Serbia and Kosovo are rising, potentially as a result of the Russia-Ukraine war or Russian efforts to divert attention away from it. The discord has prompted the NATO-led KFOR peacekeeping program to say it will intervene if necessary to keep the tensions under control

United Kingdom: In the race to succeed Boris Johnson as Conservative Party leader and prime minister, Foreign Minister Liz Truss and Former Chancellor Rishi Sunak continue to hammer each other over tax policy. In recent days, Truss, who remains the odds-on favorite to win the race, has pilloried Sunak for his effort to control the government budget deficit by hiking taxes.

With her insistence that such “stale economic orthodoxy” has hurt the British economy, Truss underscores how today’s populist, more conservative leaders are abandoning the right’s traditional belief in balanced budgets and austerity when necessary.
We see similar tendencies in other populist, more conservative leaders elsewhere in the world as well.

Chinese Foreign Policy: Many people are now familiar with President Xi’s “Belt and Road Initiative,” which aims to build Chinese influence around the world by providing capital for infrastructure projects, but it’s now becoming clear that Xi intends to supplement this economic program with his newly announced “Global Security Initiative.” Under the program, Beijing offers military training, intelligence sharing, and joint counterterrorism activities to developing countries, ostensibly to build their own independent defense capabilities and avoid Western sanctions.

In a letter to the China-Africa Peace and Security Forum last week, Xi urged African countries to support the GSI. In May, the GSI also managed to gain the support of leaders from the Latin American countries of Nicaragua and Uruguay. China’s recent effort to build security links with island countries in the Western Pacific Ocean are probably also related to the effort.
We suspect that the GSI will be an increasingly important part of China’s effort to build comprehensive influence around the world. In turn, that’s likely to exacerbate the current U.S.-China geopolitical competition, with all its negative implications for the global economy and financial markets.

Chinese Economy: As shown in the data tables below (see pdf), China’s official purchasing managers’ index for manufacturing fell to a seasonally adjusted 49.0 in July, missing expectations that it would rise to 50.3 from its reading of 50.2 in June. Like most major PMIs, the Chinese one is designed so that readings below 50.0 point to contracting activity. Separately, a private housing data provider said that July home sales by the country’s top 100 developers were down 39.7% from the same month one year earlier.

The figures suggest that the Chinese economy is recovering only slowly and fitfully from the government’s spring COVID-19 lockdowns.
Naturally, weaker demand growth in China will likely weigh on global economic activity and financial markets.

China-United States: Despite China’s effort last week to forestall the U.S. delisting of Chinese firms that don’t meet U.S. auditing disclosure standards, the SEC on Friday said internet giant Alibaba (BABA, $89.37) has been put on a list of firms scheduled to be kicked off U.S. stock exchanges in the coming years. More than 150 Chinese firms are now on that list, prompting Hong Kong Financial Secretary Paul Chan to warn that the financial center should prepare for a “worst case” scenario in which U.S.-China relations rupture definitively. The situation underscores the regulatory risk faced by Chinese companies trading on U.S. exchanges.

U.S. Fiscal Policy: West Virginia Senator Joe Manchin, who last week struck a deal to support the Democrats’ new “Inflation Reduction Act,” insisted the corporate tax hikes in his party’s bill would merely close loopholes and not unduly weigh on corporate investment, as Republicans have charged.

Besides using some $300 billion from the tax hikes to cut the U.S. budget deficit, the bill would allocate $369 billion toward green initiatives and energy reforms, and $64 billion to shore up the Affordable Care Act.
The Senate is due to take up the legislation next week before Congress leaves Washington for its August recess.

U.S. Labor Market: Boeing (BA, $159.31) has, at least temporarily, averted a strike which was due to start this afternoon at its defense-related plants in the St. Louis area. Early this morning, the company offered last-minute contract concessions related to changes it wanted to make to unionized workers’ 401(k) plans. The new contract will be subject to a union vote on Wednesday.

Even if the new contract is approved, however, we still believe the dispute and threatened strike show how today’s tight labor market has emboldened workers and given them increased bargaining power to demand better pay, benefits, and working conditions.
If it lasts long enough, the increased worker leverage will likely increase costs for companies and weigh on profit margins, potentially dragging down stock prices.

U.S. Apartment Market: In more positive news for inflation, a private data firm says U.S. apartment rents in the second quarter were up “just” 9.4% year-over-year, cooling from annual increases of more than 11.0% in each of the two previous quarters. The firm projects that rental rates will continue this trend through the coming months. Moderating rents will help lower the overall reported inflation rate, although only with a long lag.

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Daily Comment (July 29, 2022)

Posted on July 29, 2022July 29, 2022 by Amanda Ahne

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s Comment will begin with a discussion of a broad macroeconomic outlook focusing on the central bank transition away from forward guidance, the U.S. GDP contraction in Q2, and a surge in Eurozone inflation. Next, we discuss U.S.-China relations. Finally, we examine how the Russia-Ukraine war has led to greater cooperation among Western countries.

Macroeconomic Outlook: The U.S. economy has contracted two quarters in a row, but it is still too soon to call it a recession. Calls for the end of the Fed’s tightening cycle may be premature as the lack of forward guidance raises the likelihood of a market surprise, and elevated inflation in the Eurozone pressures the European Central Bank to raise rates more aggressively.

Recession? The economy shrank an annualized 0.9% in the second quarter. Back-to-back contractions in Q1 and Q2 have led to concerns that the country may be in a recession. Although consecutive contractions are typically associated with a recession, the NBER officially makes that call. The group looks at various measures of economic activity at the general and micro levels. As a result, the group takes a very long time before officially confirming that the economy is in recession. For example, the group waited 15 months after the Great Recession ended to announce that the economy was in recovery, and therefore, it is essential not to put too much weight on the latest GDP report. In our view, the economy is not in recession as Final Sales to Domestic Purchases, which excludes volatile elements of GDP, has contracted in one quarter but is still subject to revision.

Farwell, Forward Guidance: Central banks may be transitioning from forward guidance as economies slow, and inflation remains elevated. The ECB was the first of the major central banks to ditch forward guidance, and the Federal Reserve followed suit a week later. When inflation was low, forward guidance reassured investors that the central bank policy would not change in the future. However, consistently higher than expected inflation and economic deceleration have led banks to value policy flexibility over market clarity. The shift away from forward guidance will make speeches from voting members and central bankers even more critical.
Eurozone inflation: The flash estimate of the Eurozone Consumer Price Index jumped 8.9% from the year prior, setting a new record. Although inflation remains lower than in the U.S., the core CPI suggests that the momentum of the price increases continues to build in Europe. The strong reading will pressure the European Central Bank to become more aggressive in its tightening cycle in order to tame inflation. Before the report, Governing Council Member Martins Kazaks hinted at the possibility of a significant rate hike at the next ECB meeting in September. Although there is speculation that the central bank may raise rates by 50 bps, there is a strong possibility that the planned hike could be higher.

In short, the unpredictability of economic data has made it difficult for central bankers to make predictions about upcoming monetary policy. Therefore, the lack of guidance may mean the ECB and Federal Reserve could surprise markets in their next meeting depending on the latest inflation data. Although it is tempting to view a decline in GDP as a sign that the Fed could implement a pause, it is worth noting that the ECB and the Fed are mandated to maintain price stability. As a result, inflation will likely be their top focus when determining future monetary policy. When the central banks hold their respective meetings in September, they will be determining policy based on the August inflation numbers, so investors should take the July reports with a grain of salt.

China: President Biden and Chinese President Xi discussed Taiwan on Thursday, China hints at a possible slowdown in its economy, and Beijing tries to use TikTok to send propaganda to the West.

The phone call: Yesterday, President Biden and Chinese President Xi Jinping had their long-awaited phone call. As usual, both sides offered each other reassurances that the status quo should remain intact. Although the call allowed the two to clear the air, tensions between the countries persist. There is still no word on whether Speaker of the House Pelosi will travel to Taiwan next month; however, she is still set to leave for her trip to Asia on Friday. Pelosi may be pressured to travel to Taiwan to avoid looking like she is kowtowing to Beijing. In that event, China may be forced to retaliate. As a result, we believe that the trip has the potential to lead to direct conflict between the U.S. and China.
China slowdown: Leaders in Beijing signaled that China might miss its goal of a 5.5% expansion of GDP this year. This downbeat assessment reflects the negative impact of the property market crash and the country’s controversial Zero-COVID Policy on the economy. The candidness should not be a surprise as the rest of the world is currently distracted by talks about whether the U.S. is in recession. As the economy continues to show weakness, China may inject stimulus to boost growth.
China propaganda: S. lawmakers have consistently labeled TikTok as a national security threat due to its supposed ties to the Chinese government. On Thursday, a Bloomberg report revealed that a state entity related to public relations tried to create an account to target Western audiences with propaganda. Although TikTok executives supposedly pushed back on the report, the company’s association with Chinese government officials will likely unnerve U.S. politicians that feel that the social media platform may act as an arm of Beijing. Over the last few years, governments have weaponized social media to destabilize rival countries. As a result, we believe this report will not only lead to a more significant push from U.S. officials to have TikTok removed from app stores, but also lead to more regulatory oversight with how these companies manage their users’ data. Hence, this report may also have ramifications for the broader tech sector.

As we have warned in our 2022 Mid-Year Geopolitical Outlook, China is likely to push its narrative of a “rising China, falling West” going into the 20^th National Congress of the Chinese Communist Party. Therefore, it will likely view any move by the U.S. to recognize Taiwan as an independent nation as a direct threat to its national sovereignty.

Russia-Ukraine Update: The war in Ukraine continues to force the West to build closer ties with each other as it looks to respond to Russian aggression.

Preventing a crisis: The European Union aims to diversify its energy sources to ensure it has ample supply in the winter months. France and Belgium have turned to nuclear energy, Italy has explored Algeria as its new natural gas provider, and Spain has offered to deliver some of its reserves to other countries within the bloc. The sudden change in reducing their energy consumption may not successfully solve the EU’s supply needs by winter, but it will likely position the bloc to make a long-term shift away from using Russian energy in the future. In addition, the EU is planning investments to build pipelines from alternative sources, such as Algeria, Nigeria, Niger and Azerbaijan. As a result, we view the move away from Russian energy as a reflection of a long-term trend of countries looking to sever ties with unfriendly nations.
Arms sales: The U.S. approved $8.4 billion in arms sales to Germany. The purchase of U.S. weapons signals Russia’s invasion of Ukraine has strengthened the NATO alliance. The trading of weapons among allies reflects a closer military cooperation among Western allies. Over the next few years, NATO allies will ramp up purchases with each other as they look to ensure their security from outside threats. U.S. defense companies should benefit from this push initially; however, nascent European companies could also profit from the increase in defense spending.

As the war continues, we believe the world will begin to break into regional blocs. Thus, the recent moves by the European Union to diversify away from Russia reflect the West’s need not to rely too heavily on a single country outside of its bloc.

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Business Cycle Report (July 28, 2022)

Posted on July 28, 2022 by Amanda Ahne

by Thomas Wash | PDF

The business cycle has a major impact on financial markets; recessions usually accompany bear markets in equities. The intention of this report is to keep our readers apprised of the potential for recession, updated on a monthly basis. Although it isn’t the final word on our views about recession, it is part of our process in signaling the potential for a downturn.

The Confluence Diffusion Index declined for the second consecutive month. The latest report showed that seven out of 11 benchmarks are in expansion territory. The diffusion index declined from +0.8789 to +0.6364 but remains well above the recession signal of +0.2500.

Heightened recession worries weighed on the financial indicators.
Tightening financial conditions and elevated inflation have led to production slowdowns.
Employment indicators suggest that the labor market is starting to loosen.

The chart above shows the Confluence Diffusion Index. It uses a three-month moving average of 11 leading indicators to track the state of the business cycle. The red line signals when the business cycle is headed toward a contraction, while the blue line signals when the business cycle is in recovery. The diffusion index currently provides about six months of lead time for a contraction and five months of lead time for recovery. Continue reading for an in-depth understanding of how the indicators are performing. At the end of the report, the Glossary of Charts describes each chart and its measures. In addition, a chart title listed in red indicates that the index is signaling recession.

Read the full report

Daily Comment (July 28, 2022)

Posted on July 28, 2022 by Amanda Ahne

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning. We have a lot to discuss today. Today’s Comment will begin with an overview of the latest Fed meeting. Next, we will analyze the latest development in the Russia-Ukraine war and explain why we think the conflict could end in 2023. Afterward, the report examines the latest international news, including rising tensions on the Korean peninsula. We conclude the report by discussing the latest domestic developments.

FOMC: Stocks rallied and Treasury yields plunged on Wednesday after the Federal Reserve raised its benchmark rates by 75bps to 2.25% and 2.50%, in line with market expectations. Although the central bank statement maintained that further increases in its policy rate would likely continue, the market’s reaction suggests that investors believe that the tightening cycle could end soon. During the press conference, Fed Chair Jerome Powell stated that the Fed aims to lift rates into a moderately restrictive territory and described the current level as being neutral. Powell reiterated that another 75 bps might be appropriate for the September meeting.

What does it mean? The Fed is likely committed to taming inflation; however, we expect the central bank to raise rates at a slower pace throughout the remainder of the year. Powell’s insistence that the Fed will not likely provide forward guidance suggests that the central bank is open to raising rates less than 75 bps. Assuming that the latest dot plot reflects the Federal Open Market Committee’s current thinking, the Fed is set to raise rates another 100 bps this year. Barring a change, the Fed could raise rates in its next two meetings and pause in December.
- Other central banks may follow the Fed if it scales back its rate hikes. The ECB in particular is likely to reconsider its monetary path as higher rates can cause fragmentation throughout the Eurozone.

Russia-Ukraine: Russia is slashing natural gas deliveries, Ukraine forces are slowing Russian advances with U.S. weapons, and grain exports are set to leave Ukrainian ports. These developments suggest that the war will persist. However, we do see a path for potential de-escalation.

Russian gas flow to Europe dropped on Wednesday after operation capacity for Nord Stream 1 fell to 20%. Gazprom, a state-owned energy company, warned that further problems with its turbines could continue the possibility of further reduction in gas flows. As a result, gas prices in Europe surged 30% over the last two days over concerns that Russia may stop delivering gas to the EU in retaliation for the bloc’s support for Ukraine in the war.
- That said, we are not sure how long Moscow plans to withhold gas from Europe. Russia does not have the pipelines needed to redirect its natural gas to other countries; therefore, if it chooses to deny gas to Europe, it risks taking some of its wells offline due to the lack of production. Gazprom reports that natural gas production has been down 10.4% since January and 33% from a year ago.
Ukrainian forces attacked critical Russian supply routes with U.S.-supplied long-range missiles. Ukraine has used high-grade weaponry to prevent further advances from Russia into Ukraine. So far, U.S. private estimates show that over 75,000 Russians have been killed or injured or roughly half of the troops sent into Ukraine during the spring.
Wheat futures have dropped over the last few days as Ukraine prepares to deliver its grains exports through the Black Sea. Since the Russian invasion, more than 20 million tons of grains have been stranded in Ukrainian ports. The delivery should help global wheat prices. However, there are still concerns that the grain may not make it to markets.

Despite grain exports offering some price relief, commodities will perform well if Russia and Europe continue to play chicken with natural gas. Much has been made of Europe’s dependence on Russian gas, and it is therefore easy to ignore Russia’s limitations. For example, suppose Europe can make it through the winter. In that case, the Russian economy will feel the force of the sanctions, pressuring the government to reallocate its funds away from the war effort and toward bolstering the domestic economy. Remember, Russian President Vladimir Putin plans to run for an unprecedented third term in 2024. The fusion of rising inflation, a slowing economy, and burdensome sanctions is likely to cloud his election push. As a result, we expect there to be a possibility for Russia to pause its invasion in 2023 to regroup and possibly try again in the future.

International News: Rising tensions on the Korean peninsula, the increased likelihood of a left-wing populist president in South America’s largest economy, and declining consumer confidence suggest rising economic and geopolitical risks abroad.

North Korean Leader Kim Jung Un threatened to wipe out South Korea if provoked by his southern neighbor. The threat is in response to the U.S. and South Korea’s plans to have joint military exercises next month. The two sides have not carried out in-person joint military drills since 2018. While threats from North Korea are not new, there are concerns that joint exercises may agitate the country after having made progress in its missile program earlier this year.
Brazil’s Presidential front-runner Luiz Inacio Lula da Silva, revealed that if he wins the election, his economic minister will need to be politically-minded rather than a bureaucrat. Given the former president’s pro-leftist leanings, investors are concerned that Lula could pick a minister that would not support fiscally sound policies. Brazilian equities performed well during Lula’s first term in office due to a global rally in commodity prices. However, the policies he introduced toward the end of his tenure partly contributed to the downfall of his successor Dilma Rousseff.
Eurozone consumer confidence fell to an all-time low in July. The drop in sentiment reflects household concerns regarding the rising energy prices, a slowing economy, and the continuing war in Ukraine.

Domestic Developments: The U.S. is poised to pass new legislation that should provide some stimulus to the economy. Meanwhile, today’s phone call between President Biden and President Xi has the potential to be mutually beneficial for both the U.S. and China.

Democrats may have reached a deal on Biden’s scaled-back agenda. Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) agreed to legislation that would address climate change, modify tax policy, and extend the Affordable Care Act subsidies. The bill will spend $369 billion on energy-climate initiatives. Democrats still need support from Senator Kyrsten Sinema (D-AZ) for the bill’s passage. In other related news, the Senate passed legislation to support chip manufacturing in the U.S. The move will likely pave the way for additional stimulus for the economy.
- The Congressional Budget Office projects government debt as a percent of GDP to rise to 185% by 2052. The possibility of additional stimulus will likely provide some economic relief for the country. However, not enough to alter its GDP growth trajectory.

President Xi and President Biden will talk on Thursday. The focus of the discussion will be Speaker of the House Nancy Pelosi’s planned trip to Taiwan, China’s role in the Ukraine war, and possible plans for the U.S. to drop tariffs. A conversation between the world leaders will likely help the sides moderate tensions. Beijing is reeling over the news that Pelosi plans to visit Taiwan in August. Meanwhile, the U.S. does not like that China continues to elicit support for Russia. In light of rising tensions between the two countries, both seem to be in a position to make concessions. Beijing wants U.S. businesses to invest in China to generate growth before the 20^th National Congress of the Communist Party. Meanwhile, Washington is pushing China to support a price cap on Russian oil. Although we expect no significant breakthroughs in this phone call, we believe that discussions could pave the way for smoother relations.

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