Daily Comment (February 9, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

We open today’s Comment with an update on the Russia-Ukraine crisis, focusing on the interpersonal balance of power between Russian President Putin and the other major world leaders he is dealing with.  Next, we cover a range of U.S. and international developments that could affect the financial markets today.  We wrap up with the latest news related to the coronavirus pandemic.

Russia-Ukraine:  A day after French President Macron met with President Putin, which is increasingly described as a humiliating failure in the face of Putin’s uncompromising demands, the French leader held talks with Ukrainian President Zelensky in Kyiv.  In a joint press conference with Zelensky after that meeting, Macron again insisted that he sees “concrete, practical solutions” to the crisis, even if negotiating them with Putin might take months.  In contrast, Zelensky struck a more cautious note, saying Ukraine is looking for concrete steps from Putin to prove he is serious about de-escalating tensions and pulling back Russian troops from the border.

  • Macron has been trying to portray himself as a source of influence over Putin, and even though he has suggested he secured commitments from Putin to avoid any further escalation and enter talks over his security demands, the French leader is probably overstating his success.  Indeed, Kremlin spokesman Dmitry Peskov took him down a notch (or two) with a statement yesterday in which he basically said it’s not possible for Russia to put any value on a deal struck with France or Macron.  According to Peskov, “It’s impossible because France is a member of the EU, and of NATO, where it is not the leader. A different country in that bloc is the leader. So how can we speak about any ‘agreements’?”
  • We’ve written before about the way interpersonal power and leadership skills can be a decisive factor in geopolitics (for example, see our WGR from August 2021).  This week’s various diplomatic initiatives offer proof of that.  For example, Putin’s threatening military buildup on Ukraine’s border is based on the principle of “reciprocity,” as he’s offering to take away the threat and ease tensions in return for the security guarantees he has demanded.  More interesting, in his public comments and meetings with foreign leaders like Macron, the Russian leader is relying on the principle of “authority,” specifically in the sense that he is uncompromisingly “framing” or controlling the issue.  Putin’s insistence that NATO is the aggressor in this crisis and that Russia’s security is at risk may come off as fantasy to the Western ear, but strong, effective leaders who are committed to a clear goal can often move mountains by pushing their view of the world in just this manner (a fun discussion of the concept can be found in this analysis of the television series Game of Thrones).  The bottom line is that when two leaders are trying to use this framing tactic against each other, the one who wins is often the one who is most convinced of his power and importance.  When Macron publicly agreed, before he even left for Moscow, that Russia has legitimate security concerns, the French leader had already shown that his frame of the crisis was weaker than Putin’s, setting him up for failure.
  • Going forward, the key relationship here will be between President Putin and President Biden.  Although Biden has muddled his message somewhat, the administration so far has been remarkably firm in its framing of the crisis and its insistence on principles such as the territorial integrity of Ukraine and the right of any sovereign nation to apply for membership in NATO.  Selling weapons to Ukraine and deploying U.S. troops to Eastern Europe has also sent a strong signal of firmness.  Diffusing the crisis, forcing Putin to back down, and removing this geopolitical threat from the financial markets may well turn on Biden and the administration maintaining their uncompromising rejection of Putin’s demands and tactics.

U.S. Fiscal Policy:  Yesterday, the House passed a bill to keep the federal government funded through mid-March, advancing a temporary fix that will give negotiators time to reach an overall agreement on fiscal 2022 spending after weeks of negotiations failed to yield a deal.  The Senate now plans to take up the measure and pass it quickly before the current temporary deal ends on February 18.

  • If the stopgap spending bill does not pass by then, it will force the government into a partial shutdown.
  • As we noted in our Comment yesterday, such an event would be negative for the financial markets because it would once again force investors to consider the risk of a U.S. debt default.

U.S. Monetary Policy:  As we’ve been arguing, the increasing panic about inflation among Federal Reserve policymakers and many investors may not lead to as many interest-rate hikes as people think.

  • One consideration is that the current extended period of low interest rates probably bred excess risk-taking or other fragilities in corners of the financial market.  Even the mere rhetoric about higher rates could expose those problems and spark so much volatility that policymakers end their tightening programs early.
  • On top of that, high debt levels and other economic headwinds may mean that even modestly higher rates will slow activity too much.  Indeed, some emerging markets that tightened policy early now face that very dilemma.  If economic growth proves more sensitive to rate hikes than the major central banks now believe, the policymakers may have to stop hiking their benchmark rates well before the market expects.
  • If the Fed, the ECB, and other major central banks show any hint in the coming months of ending their tightening phase early, it would likely give a major boost to both bond prices and the value of risk assets.

United States-China:  In another sign of economic decoupling amid increased U.S.-China geopolitical tensions, U.S. regulators are reportedly planning to get more cautious about approving dozens of cancer drugs and other new medicines developed in China.  Specifically, the regulators have expressed concerns about the quality of studies largely conducted in China and whether the results can apply to patients in the U.S.

Japan-Taiwan:  In yet another sign of how China’s geopolitical aggression is pushing the U.S. and its allies into closer cooperation, Taiwan said it would relax a ban on Japanese food imports put in place after the 2011 Fukushima nuclear disaster.  The move is probably designed not only to help Taiwan secure more defense cooperation with Japan but to support its application to join the CPTPP trans-Pacific trade agreement.  In either case, greater Japan-Taiwan cooperation could boost each country’s trade and economic growth, which should be positive for investors.

Digital Currencies:  The Justice Department yesterday said it seized over $3.6 billion worth of digital currency stolen during a hack of a cryptocurrency exchange in 2016 and arrested two suspects for allegedly trying to launder the proceeds.  Although advocates cite transaction privacy and security as key advantages to digital currencies, the Justice Department action illustrates both the government’s improving capabilities in cyber investigations and the fact that digital currencies can’t be deemed 100% secure.

COVID-19:  Official data show confirmed cases have risen to  401,426,692 worldwide, with 5,766,919 deaths.  In the U.S., confirmed cases rose to 77,053,769, with 909,018 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 213,061,117, equal to 64.2% of the total population.


 Economic and Financial Market Impacts

  • The massive Canadian trucker protest against vaccine mandates, which we described here yesterday, now threatens to spill over into the U.S.  Last night, protestors and their supporters shut down the Ambassador Bridge linking Detroit with Windsor, Ontario.  The bridge was reopened early this morning, but the incident suggests the truckers could try again to disrupt U.S.-Canadian trade in order to call attention to their demands.  These protests could also inspire copycat demonstrations in which truckers use their big rigs to occupy major U.S. thoroughfares to protest pandemic rules.
  • Preliminary data from the CDC suggest the pandemic has led to a smaller baby bust than earlier feared.  According to the data, the U.S. saw only about 7,000 fewer births through the first nine months of 2021 compared with the same period the year prior.

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