Daily Comment (August 10, 2022)
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 lots of new developments related to the world’s energy markets. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today.
Russia-Ukraine: Russian forces continue to stage only limited attacks in Ukraine’s northeastern Donbas region, even as they launch sporadic missile and long-range artillery sites across the country and work to reinforce the territory they hold in and around the southern city of Kherson. The Ukrainians are still carrying out a limited counteroffensive to retake Kherson, but their efforts in recent days have focused on launching more long-range missile and artillery strikes against Russian logistics nodes. Unconfirmed reports yesterday suggested that the Ukrainians were able to blow up two major ammunition depots deep inside Russian-occupied Crimea.
- On the energy front, Russian state-owned energy transporter Transneft said yesterday that it shut down all crude oil exports through its Druzhba pipeline running across Ukraine to southern and eastern Europe on August 4, citing payment problems linked to Western sanctions against Moscow. Transneft said this morning that it is working to restart the pipeline after receiving payment from a Hungarian oil firm, but the renewed flows are not yet confirmed.
- The move by Transneft would have curtailed oil deliveries to Slovakia, Hungary, and the Czech Republic and would likely intensify European efforts to buy crude from non-Russian sources.
- In response, oil prices rose approximately 1.3% yesterday, with Brent reaching $97.88 per barrel. On news of the possible restart of the pipeline, Brent this morning has given back all of that rise and more, now trading at $94.68.
- Separately, IMF modelling has shown that more cross-border sharing of natural gas in Europe could significantly reduce the negative impact of a Russian embargo this winter, almost halving the hits to the economies of central and eastern Europe at low cost to those allowing the gas to flow. Europe still faces a challenging energy crisis, but the analysis suggests the continent could weather things better than anticipated if it can make quick progress on improving its interconnection infrastructure.
- Nevertheless, Europe still faces challenges in trying to wean itself off Russian energy. In a new sign of that circumstance, a regasification plant proposed for the port of Piombino in Sicily, which would allow Italy to import more liquified natural gas, is being heavily resisted by local politicians affiliated with the country’s major right-wing parties.
European Energy Crisis: As drought continues to drain the water reservoirs behind Norway’s hydroelectric plants and pushes up electricity prices, the Norwegian government said it will curb electricity exports to Europe until the reservoirs rise back to normal levels. Along with reduced electricity exports from France because of corrosion issues at some of its nuclear plants, the reduction in Norwegian supply will further exacerbate Europe’s energy crisis and potentially worsen its economic slowdown this year.
China-Taiwan-United States: In a dramatic sign of how far Taiwan is willing to go to plant itself firmly in the evolving U.S.-led geopolitical bloc, Taiwanese national security officials vowed to force giant contract electronics manufacturer Foxconn (HNHPF, 7.02) to unwind its recent $800 million investment in privately held Chinese chipmaker Tsinghua Unigroup.
- Although Foxconn hoped the investment would help it move into higher-value added manufacturing and away from its traditional focus on low-margin assembly, Taipei is concerned that the deal could lead to Foxconn bankrolling Beijing’s tech ambitions.
- Taiwanese officials also want to avoid being seen as helping China in its technology rivalry with the U.S., nor do they want to risk being sanctioned for perceived entanglements with Chinese firms.
- The development is another example of how countries around the world are refocusing their investment and trade ties toward their friends in relatively separate geopolitical and economic blocs. As we’ve written before, the resulting disruptions to global supply chains will likely produce higher prices, higher interest rates, and lower corporate margins over time.
China-Australia: An Australian metals firm has applied to the government for a review of anti-dumping measures against China in response to a surge in Chinese aluminum extrusion exports to Australia this year. The new trade action threatens to derail the budding China-Australia rapprochement after two years of tensions and Chinese import restrictions against Australian products.
U.K. Politics: In the race to succeed Boris Johnson as Conservative Party leader and prime minister, Foreign Minister Liz Truss has proposed that Cabinet ministers should have the power to override financial regulators, including the Bank of England, if they are seen as holding back on post-Brexit reforms. The proposal is another sign that the central bank is likely to have its wings clipped if Truss wins as expected. Politicization of monetary policy and financial regulation could ultimately be a negative for the U.K.’s investment climate.
U.K. Labor Market: The Royal Mail announced today that the Communications Workers Union plans to strike on multiple days in August and September to protest the company’s plan to break up. The planned strike, along with many others in the U.K. and other countries, illustrates how today’s tight labor markets have given workers around the world more leverage, raising company costs and keeping inflation pressures high.
U.S. Semiconductor Industry: As firms and consumers continue to shift back to normal after their pandemic-driven plunge into technology investments, Micron Technology (MU, 59.15) yesterday warned that semiconductor demand is weakening much faster than anticipated. The comments build on a flurry of bad news from chipmakers, which have cited slowdowns in sales linked to PCs, graphics cards, and videogames.
U.S. Fiscal Policy: New analysis shows that the corporate minimum income tax of 15% in President Biden’s “Inflation Reduction Act” doesn’t meet the standards that the U.S. signed up to when approving the OECD’s global corporate minimum tax deal last year. With the U.S. as an outlier in the system, multinational companies will face more tax complexity, may try to game the system by shifting operations to other countries, and potentially face make-up taxes abroad.