by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with the continuing troubles in the global cryptocurrency markets, as well as welcome signs that inflation is continuing to slow even outside of the United States.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including the latest on the COVID-19 wave ripping through China and the worsening U.S.-China geopolitical frictions.  We also note that the Federal Reserve will release its latest interest-rate decision and economic projections today at 2:00 pm ET.

Global Cryptocurrencies:  Investors pulled $1.1 billion out of top cryptocurrency exchange Binance yesterday, bringing the seven-day total of withdrawals to $3.6 billion.  Binance CEO Changpeng Zhao played down the withdrawals, which are the firm’s biggest since June, but we still believe they reflect growing investor jitters regarding cryptocurrencies as investors see more revelations of fraud and operational issues at now-bankrupt crypto firms like FTX.  Such jitters could lead to further volatility and falling values for crypto assets in the near term.

United Kingdom:  Following on yesterday’s report showing cooler U.S. inflation, the U.K. today said its November consumer price index was up 10.7% from the same month one year earlier, marking a modest slowdown from the 11.1% rise in the year to October.  Excluding the volatile food and energy components, the November “core CPI” was up 6.3% year-over-year, compared with 6.5% in October.

• The slowdown in British inflation partly reflects the government’s decision to cap energy prices beginning in October. As a result, the October inflation rate was likely the peak for the U.K.
• All the same, cooling inflation readings around the world would likely help encourage the major central banks to slow their interest-rate hikes, beginning with the U.S. today (see discussion below).

European Union-Qatar:  Investigators now believe that Qatar’s apparent bribery of European Parliament members, revealed this week, may have been directed toward securing last year’s EU-Qatar “open skies” agreement.  That deal gave Qatar Airways (Qatar’s state-owned flag carrier and one of the world’s largest airlines) essentially unlimited access to the European market.  European legislators are now looking for ways to scale back the deal.

Denmark:  After failing to win an outright majority for her center-left Social Democratic Party in the November elections, Prime Minister Frederiksen said she has agreed to form a left-right coalition government with the center-right Liberal Party and the Moderate Party.  This would mark Denmark’s first left-right alliance in decades.

Russia-Ukraine War:   Heavy fighting continues along the frontlines in eastern and southern Ukraine, with the Russians continuing to mount air, missile, and drone strikes against Ukrainian civilian energy infrastructure throughout the country.  Using their current air-defense weapons, the Ukrainians continue to destroy many of the incoming missiles and drones, reportedly including an entire wave of 13 drones directed at Kyiv yesterday.  Nevertheless, the Biden administration is finalizing plans to provide Patriot air-defense missile systems to Ukraine.  If the systems are given to Ukraine, they would be the most sophisticated weapons that the U.S. has provided since the war began.

• One issue with the Patriots is that they are in high demand globally, so sending some units to Ukraine would likely mean less units for other locations, at least until more can be produced.
• As with the rest of the money and weapons systems that the U.S. has provided, the benefit would be to shore up Ukraine, a budding ally, and to weaken Russia, a key threat to the U.S., without having to send U.S. troops. Nevertheless, the decision would likely generate pushback from isolationists on the left and right of the U.S. political spectrum.

China:  Now that the government has relaxed its strict requirements on COVID-19 testing and quarantines, leading to a massive waves of new infections, it has also admitted that its official infection data is no longer reliable.  With so many people no longer being tested, it also announced that it will no longer publish data on asymptomatic cases.  Now that the government has essentially decided to let the disease rip through the country, we expect the resulting sickness, self-isolations, and business disruptions to negatively affect the Chinese economy and financial markets, with negative implications for the global economy and markets.

U.S.-China Technology Trade:  The U.S. government is reportedly preparing to place more Chinese technology companies on one of its key “entity lists,” which will prohibit U.S. tech firms from selling to them.  The firms to be targeted include memory chip firm Yangtze Memory Technologies, also known as YMTC, and surveillance camera producer Tiandy Technologies.

• While the Chinese government had recently begun cooperating with the U.S. in order to confirm that some of its technology firms were meeting the tough new technology transfer rules imposed by the U.S. on October 7, it appears YMTC and Tiandy were not cooperating.
• In any case, the new U.S. action will further exacerbate bilateral relations. It also underscores how much momentum there is in the bipartisan U.S. clampdown on China’s technology sector.  That clampdown increasingly appears to be effective and will likely have a noticeable slowing effect on Chinese economic growth.

U.S.-China Military Competition:  Although China and Russia continue to lead in the new class of maneuverable, super-fast “hypersonic” missiles, late last week the U.S. Air Force finally scored its first successful test of its own fully operational version, which it has designated as the “Air-launched Rapid Response Weapon.”  That test, following a successful test of the weapon’s booster earlier this year, has helped make up for a disastrous 2021, when three straight tests had ended in failure.

• Now that China has built up a conventional military that could potentially prevent the U.S. Navy from entering the waters around China in time of conflict, the competition between the Great Powers is increasingly focused on high technologies like artificial intelligence, supercomputing, hypersonic missiles, and autonomous weapons.
• However, even though the U.S. hypersonic program now appears to be on track, officials at the Pentagon are still debating whether and how it should fit into the U.S. arsenal in the coming years.

U.S. Monetary Policy:  The Federal Reserve today wraps up its latest two-day policy meeting, with the decision due to be released at 2:00 pm ET.  The policymakers are widely expected to hike their benchmark fed funds interest rate by just 0.5%, to a range of 4.25% to 4.50%, after four straight hikes of 0.75%.  They will also release their updated forecasts for key economic indicators and the path of interest rates going forward.

U.S. Fiscal Policy:  As Congressional leaders scramble to avoid a partial government shutdown when the current funding law expires on Friday night, top Democrats and Republicans said they have reached a bipartisan framework that should allow for enactment next week of an omnibus spending bill covering the remainder of the fiscal year.  Today, the House will vote on an extension of the current funding until next week, and the Senate is expected to vote on the extension shortly thereafter.  If implemented, the deal will eliminate the threat of a government shutdown that would likely be negative for the U.S. economy and financial markets.

U.S. Politics:  According to a new Wall Street Journal poll, prospective Republican primary voters would favor Florida Governor Ron DeSantis over former President Donald Trump by a margin of 52% to 38%.  Among all voters, the poll also found that DeSantis is viewed favorably by a much higher number than Trump, suggesting DeSantis is currently in the driver’s seat for the Republican presidential nomination in 2024.

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