Daily Comment (February 18, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
In today’s Comment, we open with an update on the Russia-Ukraine crisis, where most of the optimism generated earlier in the week has now dissipated. Government officials and investors seem increasingly resigned to the possibility of war, as reflected in yesterday’s activity in the financial markets. We next review U.S. news with the potential to affect the markets today, followed by a discussion of various international developments. We wrap up with the latest on the coronavirus pandemic.
Russia-Ukraine: It now appears more certain that Russia is not pulling back its troops from their positions near Ukraine, as Russian officials said early this week. Moreover, it’s starting to look like President Putin may have decided to justify an invasion on false assertions that Ukraine is persecuting ethnic Russians in and around the breakaway provinces of Donbas and Luhansk in far eastern Ukraine.
- At the United Nations yesterday, Russia formally leveled allegations that Ukraine is pursuing a “genocide” against Russian speakers. At the same time, Russian separatists in Donbas and Luhansk have continued to increase their shelling of areas controlled by Kyiv, as we noted in our Comment That shelling seems designed to spark a military response from Ukraine that Russia could say requires intervention. The Ukrainian government said today its troops have been issued orders to exercise restraint when responding to artillery fire to not give Russia a pretext to invade.
- For good measure, Russia yesterday also expelled the second-ranking diplomat at the U.S. Embassy in Moscow, probably hoping for a more-than-proportionate response from the U.S. that would provide a further pretext for a conflict. However, the Russian military also announced that its strategic missile forces would conduct an exercise involving multiple test launches of intercontinental ballistic missiles (ICBMs) and cruise missiles, the type used in a nuclear war. Those exercises are actually not unusual for Russia, but they are usually held in the autumn. Announcing they will be held now, in the midst of the crisis, is likely intended as a reminder of the ultimate risk if the U.S. and NATO choose to fight Russia.
- More broadly, the Russians replied negatively to the recently written messages from the U.S. and NATO, saying they would not accede to the Kremlin’s demands for a legally binding commitment never to admit Ukraine to the alliance and roll back NATO’s eastern expansion. In sum, the Russians are, once again, threatening to take military measures if their demands are not met.
- As we’ve mentioned before, the Russian demands seem to be backfiring on them, as the threat to Ukraine has reinvigorated NATO and again been able to show its value.
- In fact, at a meeting of NATO defense ministers yesterday, the alliance discussed plans to deploy rotating joint forces to Romania, similar to those now regularly deployed to Lithuania, Latvia, Estonia, and Poland. In a more specific show of support for Ukraine, the U.K. government said it would ease visa requirements for some Ukrainians trying to flee the country.
- Separately, European Commission President Ursula von der Leyen briefed EU national leaders yesterday on a sanctions package, which is now ready to be applied if Russia invades.
- In a last-ditch effort to avoid a conflict, Secretary of State Blinken requested an urgent meeting with Russian Foreign Minister Lavrov, and U.S. officials said that meeting is scheduled for late next week. Nevertheless, President Biden sounded resigned to hostilities yesterday, saying, “Every indication we have is they’re prepared to go into Ukraine . . . My sense is this will happen within the next several days.”
U.S. Fiscal Policy: The Senate yesterday passed a stopgap spending bill to keep the federal government funded until mid-March and avoid a partial shutdown at midnight Friday. Passage of the bill now frees appropriators to put their full attention on hammering out a deal on an omnibus spending bill to fund the government through the remainder of fiscal 2022.
U.S. Housing Market: According to mortgage-finance giant Freddie Mac, the average rate for a 30-year, fixed-rate loan rose to 3.92% for the week ended Thursday, compared with just 3.69% one week earlier. Driven by rising Treasury yields and expectations for a series of interest-rate hikes by the Federal Reserve, the latest rate is the highest since May 2019.
- Coupled with the sharp rise in home prices over the last year, the increase in mortgage costs is soon likely to start cooling the red-hot home market.
- If home values really do start to moderate, it will likely make many consumers feel less affluent and could take some of the wind out of consumer spending. In turn, that would help pull down inflation.
Canada: Police have begun arresting the truckers and other people who have been staging disruptive protests against the government’s COVID-19 rules in the capital city of Ottawa. The arrests so far don’t seem to be producing any violence. It appears the government will take control of the situation soon; the protests nevertheless have revealed a potentially destabilizing populist streak in Canadian society similar to that which has developed in the U.S. and other major democracies.
China: The National Development and Reform Commission and 13 other government agencies issued a joint statement that authorities would guide online delivery-platform operators toward lowering the fees they charge to restaurant owners. The initiative ostensibly aims to reduce restaurants’ operating costs, but it also represents another step by President Xi to rein in the country’s powerful, fast-growing technology firms. The move has sparked another steep drop in Chinese technology stocks so far today.
European Union-China: The EU is taking China to the WTO for patent infringements costing companies billions of euros as part of what officials in Brussels claim is a “power grab” by Beijing to set smartphone technology licensing rates.
- Smartphone makers have agreed on global standards for telecommunications networks, and in return, technology manufacturers must license their patents to others. If they cannot agree on a price, they go to court to set it.
- Chinese courts generally set prices at half the level of those in the west, meaning their companies pay less for the technology from overseas providers.
- In August 2020, China’s Supreme People’s Court decided Chinese courts can impose “anti-suit injunctions,” which forbid a company from taking a case to any court outside the country. Those that do are liable for a €130,000 daily fine, and the judgments of courts elsewhere are ignored.
- Although many European countries are reluctant to spoil their economic relationship with Beijing, the WTO complaint indicates they increasingly see the economic risks involved and are now more willing to push back. The move may help preserve European technology and help technology firms, but the risk is that EU countries could eventually face retribution from China.
France: The French government said it would pump €2.1 billion into state-controlled electricity utility EDF (ECIFY, $1.84) to help make up for production outages at several nuclear plants. The funding, via a rights issue, would also help ease the financial stress caused by the government’s cap on electricity bills for households and businesses amid Europe’s surging energy prices. The move illustrates the financial cost for European countries that try to shield consumers from the worst of the energy crisis.
COVID-19: Official data show confirmed cases have risen to 420,166,191 worldwide, with 5,865,242 deaths. In the U.S., confirmed cases rose to 78,269,887, with 931,742 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 214,474,721, equal to 64.6% of the total population.
In the U.S., data continues to suggest the highly transmissible Omicron mutation is in retreat. The seven-day average of people hospitalized with a confirmed or suspected COVID-19 infection fell to 78,213 yesterday, down 40% from just two weeks earlier.
- As the Omicron wave surges through Hong Kong, the Chinese government is struggling to make sure it doesn’t spill into the mainland and spoil President Xi’s “zero-COVID” goals. Authorities are especially worried about illegal border crossings from Hong Kong to China.