Daily Comment (August 30, 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, where the key news is Ukraine’s official announcement that it has launched its long-awaited counteroffensive to retake the southern city of Kherson from its Russian occupiers.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, many of which are focused on political and economic turmoil in the emerging markets.

Russia-Ukraine:  In what could be one of the key moments in the war so far, Ukrainian officials announced the beginning of their big counteroffensive to retake the southern Ukrainian city of Kherson.  Although Kyiv has been taking preparatory steps for that attack for many weeks, it has been unclear whether the signaled counteroffensive was really going to happen, or whether it was just a feint.  In any case, Ukrainian forces have reportedly pushed the Russians out of a number of villages west, northwest, and northeast of Kherson and continue to pressure Russian lines elsewhere in the region.  Despite the Ukrainian counteroffensive in the south, Russian forces continue to launch missile and artillery strikes against both civilian and military targets throughout Ukraine.

Eurozone:  ECB Chief Economist Philip Lane said the central bank should strive to hike interest rates in steady, small increments.  His statement suggests he may push back against some ECB officials’ calls for a big 75 bps hike at their policy meeting next week.

China:  Officials have discovered a new coronavirus subvariant, BF.15, in multiple people in the southern Chinese technology hub of Shenzhen, prompting the city to close subway stations, ban restaurant dining, and lock down shopping malls.  Local officials promise the shutdowns won’t become worse, but the outbreak raises new fears of an important new lockdown under President Xi’s Zero-COVID policy.

Iraq:  After ten months of failed negotiations to form a new government, influential Muslim cleric Muqtada al-Sadr said he will quit politics; however, the announcement sparked rioting by his supporters, resulting in dozens of deaths in Baghdad yesterday.  The incident suggests Iraq will continue to face political violence and instability for the near term.

Pakistan:  As predicted in our Comment yesterday, the IMF has approved the resuming of lending to Pakistan under an existing $7 billion deal that had been stalled because of the government’s reluctance to implement austerity policies.  Securing the new funding means Islamabad has now pushed off the threat of a near-term default, although it still faces financial risks in the medium term because of issues like its fractious political dynamics and recent flooding.

Sri Lanka:  Amid Sri Lanka’s ongoing negotiations for a bailout loan from the IMF following its default in May, President Wickremesinghe announced plans for further austerity measures to secure a deal.  The plans would further increase taxes (including hiking the value added tax from 12% to 15%), strengthen central bank independence, and reallocate government funds toward relief programs.

Colombia-Venezuela:  Colombia’s new leftist president, Gustavo Petro, has re-established diplomatic relations between his country and Venezuela.  The move leaves the U.S., Canada, and Brazil as the only large countries in the hemisphere that no longer recognize Venezuela’s authoritarian government.

U.S. Financial Payments System:  Yesterday, Federal Reserve Vice Chair Brainard said the central bank’s new “FedNow” system for faster payments will be live by next summer.  The new system will allow bill payments, paychecks, and other common consumer or business transfers to be available quickly and around-the-clock, versus the existing system that is closed on weekends and can, at times, take several days before funds become available.

U.S. Manufacturing:  Spurred by recent legislation that provides a range of incentives and subsidies for renewable energy, top U.S. solar panel maker First Solar (FSLR, $121.69) said it will spend as much as $1.2 billion to boost its domestic manufacturing capacity by around 75%.  The new capital investment will be targeted toward a new facility in the Southeast and upgrading an existing facility in Ohio.

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