Daily Comment (February 10, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with an update on the Russia-Ukraine conflict. Up next, in the U.S. economics and policy section, we discuss the Canadian trucker protest and a few other stories. We then review central bank news, and we end with our pandemic coverage.

Russia-Ukraine: The situation in Ukraine remains fluid. On Thursday, Russia and Belarus began one of their largest joint military drills since the Cold War.  In Ukraine, troops have started drills using armed drones and antitank weapons provided by NATO and the U.S. Although Russia adamantly denies it is preparing to invade Ukraine unprovoked, the two sides appear to be getting ready for conflict. Additionally, leaders from the West are preparing for a response in case of a Russian invasion, even as they explore a path to de-escalation. British Prime Minister Boris Johnson has urged solidarity with NATO allies, as he plans to travel to Warsaw and NATO headquarters in Brussels. The U.K. sent 350 troops to Poland on Monday as a sign it is ready to defend Poland in the event of Russian aggression. Meanwhile, British Foreign Secretary Liz Truss traveled to Moscow to share the U.K.’s concerns about Russia’s actions along the Ukraine border to her Russian counter. In a speech, she warned that an invasion would lead to a severe response from the U.K. In response, Russia’s Foreign Minister Sergei Lavrov stated his country would not be cowed by threats made by the West.

Russia’s continued interaction with Western leaders and diplomats is possibly a sign that it does not intend to invade Ukraine imminently. We suspect Russia is trying to see what concessions it can get from the U.S. and NATO before deciding to invade Ukraine or withdraw its troops from the border. Russia would like a commitment from NATO that it will not admit Ukraine into the alliance, but we suspect Russia may be satisfied if Ukraine granted the regions Donetsk and Luhansk more autonomy. This will allow Russia to maintain its influence in those regions and Ukraine to retain its territorial integrity. We assume both Ukraine and Russia will push for a resolution before local elections in two major cities in Donetsk take place on March 27.  As the situation continues, some countries are already preparing for possible energy supply disruption. South Korea announced on Wednesday that it is prepared to release its strategic oil reserves in the event of a conflict. At this time, we suspect cooler heads will prevail, which should be bearish for commodity prices.

Economics and policy:

 Iran nuclear talks appear to be entering their final stages, according to the U.S. State Department. The two sides began discussions this week, and negotiations have reportedly been successful. The major obstacle in securing a deal is convincing Iran to revert to the curbs established in the 2015 agreement. If an agreement is reached, Iran would be able to sell its crude oil in the global market, and this should put downward pressure on oil prices.

Central bank news: 

  • Susan M. Collins was chosen to replace Eric S. Rosengren at the Federal Reserve Bank of Boston. She will be the first woman of color to take over one of the central bank’s 12 districts. Currently, Collins is provost and executive vice president for academic affairs at the University of Michigan. The new president will have a voting role on the FOMC committee this year. She has stated that she is committed to maintaining the Fed’s inflation and employment mandates.
  • The Bank of Japan has offered to buy unlimited quantities of government debt next week to head off investors who are testing the central bank’s commitment to yield curve control. In Japan, a sudden pick-up in inflation has led traders to speculate that the BOJ could begin to tighten monetary policy. The move by the BOJ suggests it is committed to ensuring its 10-year yield does not rise above the 0.25% level.
  • The Reserve Bank of Australia ended its quantitative easing program on Thursday. The central bank’s balance sheet tripled under the program to about A$650 billion. Following the end of quantitative easing, the bank has not indicated what it would do with its purchases. Governor Philip Lowe stated the RBA would decide in May whether it would reinvest the proceeds of maturing bonds. There is no expectation the RBA will run off its balance anytime soon. Its first notable bond maturity isn’t until April 2023.

COVID-19:  The number of reported cases is 403,909,435, with 5,779,881 fatalities.  In the U.S., there are 77,267,876 confirmed cases, with 912,257 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 673,608,245 doses of the vaccine have been distributed with 544,772,697 doses injected.  The number receiving at least one dose is 251,467,303, while the number of second doses is 213,246,140, and the number who have received the third dose, granting the highest level of immunity, is 90,533,404. The FT has a page on global vaccine distribution.

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