Daily Comment (April 5, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

We open our Comment today with an update on the Russia-Ukraine war, where the newly discovered atrocities by Russian troops continue to reverberate.  Further sanctions against Russia are due to be announced as early as today, while reports say the Czech Republic has sent a small number of Soviet-era tanks to the Ukrainians.  We next review a range of international and U.S. developments with the potential to affect the financial markets today.  We close with the latest news on the coronavirus pandemic.

Russia-Ukraine:  The most recent reports confirm Russian forces continue to withdraw from around the capital city of Kyiv.  They are now redeploying for what will likely be an effort to take control of Kharkiv, the Donbas region of eastern Ukraine, and the entire southern coastline of the country.  In the areas where Russian forces have pulled out, Ukrainian authorities continue to uncover evidence that they committed war crimes against civilians, including rapes, torture, and mass executions.  As we discussed in our Comment yesterday, reports of the atrocities have sparked calls for additional sanctions against Russia.  In addition, several European countries yesterday registered their disgust by expelling large numbers of Russian diplomats.  Germany and France each expelled dozens.  Lithuania even expelled the Russian ambassador.  Ukrainian President Zelensky will make a video speech to the UN Security Council regarding the atrocities today, which could fuel further actions to punish the Russians.  Separately, the continuing war has prompted further military support for Ukraine, including the Czech Republic’s quiet provision of more than a dozen Soviet-era tanks to Kyiv in recent weeks.

  • The European Commission today is set to propose broad new sanctions on Russia, including a ban on imports of Russian coal, a cap on the import of potash for fertilizer (also widely purchased from Russian ally Belarus), restricted access to the bloc for Russian land and sea shippers, and a block on some high-tech machinery exports.
  • Once the new round of sanctions is announced, attention is expected to turn toward developing a ban on importing oil from Russia. Although many EU countries are still resistant to the idea of cutting Russian oil and gas imports, political momentum for such a move is becoming overwhelming.  A compromise currently being discussed would impose tariffs on Russian oil and/or gas in order to start ratcheting down demand.  The discussions suggest commodity markets will continue to be roiled by the Russia-Ukraine war for the foreseeable future.
  • Meanwhile, the U.S. Treasury Department said it would make it more difficult for the Russian government to make debt payments in dollars through U.S. banks, bringing Moscow one step closer to a potential default on its obligations to international investors.
    • The department said it would no longer permit any dollar debt payments to be made from Russian government accounts at U.S. financial institutions. Russia, therefore, must choose between draining its remaining dollar reserves, using new revenue coming in, or defaulting.
    • The Russian government had been due to make an $84 million coupon payment and a $552 million repayment on a maturing bond yesterday, but it was unable to proceed because of the department’s action. Russia now has a 30-day grace period to get the cash to investors before it is in default.
    • Prices for Russian sovereign dollar bonds had rebounded somewhat from their post-invasion slump, but they started falling again today. A bond maturing in 2028 traded at a price of 34 cents on the dollar, down from 42 cents yesterday.
  • As we’ve discussed many times before, the war and the resulting sanctions continue to accelerate the breakup of the global economy into two or more blocs: a U.S.-led block of liberal, free-market democracies; a Chinese-led bloc marked by heavy state intervention in the economy and authoritarian politics; and perhaps a group of smaller economies trying to maintain their freedom to maneuver.  Importantly, such fracturing may be hard to reverse once it happens.

Brazil:  State-owned oil giant Petrobras (PBR, $15.15) has been thrown into disarray after the government’s choice of a new chief executive pulled out of the job over conflict-of-interest rules, just a day after the withdrawal of an incoming chair also handpicked by Brasília.

United States-China:  As Chinese regulators continue to show new flexibility in meeting U.S. demands for access to audit records for Chinese companies listed in the U.S., some Chinese firms are reportedly using workarounds to prevent their delisting here.  That has raised hopes for a thaw in U.S.-China capital flows, but it’s important to note that U.S. regulators still need to sign off on the moves.

U.S. Labor Market:  In another sign that the tight labor market has shifted economic power toward workers, an eight-day strike by Sacramento teachers and school staff ended in a tentative deal to boost pay and improve health benefits.  To date, businesses and organizations have been able to absorb the higher cost of compensation and benefits.  Corporate profits remain robust.  Going forward, however, continued high employment costs could potentially cut into profits, spur further inflation, and weigh on stock prices.

  • The deal, which the unions and school board will vote on later this week, includes annual 4% pay raises for teachers and staff, plus back pay retroactive to 2019-20 and bonuses.
  • Substitute teachers will get 25% higher pay, and the staff contract includes several provisions to recruit more bus drivers, including a $5,000 signing bonus.

U.S. Cryptocurrency Regulation:  As SEC Chair Gensler continues to look for ways to regulate digital currency exchanges, he has asked his staff to explore forcing them to separate their custody and market-making functions.

  • To support the effort, Gensler cited statistics showing that some $14 billion in crypto assets were stolen last year, and issues can arise when crypto exchanges trade as principals against their own customers on their platforms.
  • Gensler’s continued push for SEC regulation of crypto exchanges is a reminder that the asset class faces significant regulatory risks, despite the growing popularity of digital currencies.

COVID-19:  Official data show confirmed cases have risen to  493,924,905 worldwide, with 6,171,092 deaths.  In the U.S., confirmed cases rose to 81,495,687, with 997,129 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 are considered fully vaccinated now totals 217,882,466, equal to 65.6% of the total population.


U.S. Policy Responses

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