Daily Comment (February 22, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

On this historic day, as the post-Cold War global order hangs in the balance, our Comment opens with an update on the Russia-Ukraine crisis.  Events on the ground are developing rapidly, but as of this writing, the key developments are that President Putin has ordered Russian troops into Ukraine’s breakaway Donetsk and Luhansk regions and issued a lengthy statement questioning the rest of Ukraine’s independence and legitimacy.  Following our update on Russia-Ukraine, we cover a range of U.S. and other international developments.  We close with the latest on the coronavirus pandemic.

Russia-Ukraine:  Over the long Presidents Day weekend in the U.S., a series of false-flag attacks and a manufactured refugee crisis in Donetsk and Luhansk culminated in President Putin’s signing of documents recognizing the breakaway Ukrainian regions as independent states and establishing mutual aid commitments between them and Russia (see map below).  Press reports have emphasized Putin’s subsequent decision to order Russian troops into Donetsk and Luhansk as “peacekeepers.”  We think the more significant story is Putin’s long speech yesterday reiterating his view that Ukraine is an integral part of Russian culture that can’t legitimately be independent of Russia.  That signals that Putin will probably try to take control of the entirety of Ukraine, at least eventually.  Such a move would be consistent with the current deployment of Russian forces along the entire northern and eastern borders of the country, and it is also consistent with top U.S. officials’ statements that Russia will even attack the capital city of Kyiv in western Ukraine.

  • The latest commercial imagery intelligence shows Russian forces along the border have now left their bases and garrisons and have been deployed throughout the countryside in attack formation.  Those forces can’t reasonably be kept in such positions for more than a few days, so it appears that a large-scale offensive is imminent.  Some reports so far this morning say columns of Russian troops have already entered Donetsk and Luhansk.
  • Meanwhile, we continue to note more small deployments of U.S. military units to Europe beyond transferring of 6,000 or so troops that has been widely reported.  For example, a dozen F-35A Lightning II fighter jets and 350 airmen from Hill Air Force Base in Utah have been sent to Germany, eight F-15E Strike Eagles from Johnson Air Force Base in North Carolina have gone to Poland, and six KC-135 Stratotankers based in the U.K. have been deployed to Ramstein Air Base, Germany.  Separately, Defense Secretary Austin said the U.S. is examining whether to send additional forces to the Baltic countries.
    • At first glance, the small scale of these little-reported deployments may not seem to make sense.  However, it could be the U.S. and its NATO allies are trying to ramp up their capabilities slowly enough to avoid triggering a further Russian mobilization in response.  It’s also important to remember that modern U.S. and NATO military equipment is so advanced that small numbers of aircraft and ships still represent significant firepower, especially against an old-school, heavy-armor oriented ground force like Russia’s.  That goes for infantry troops as well.  A U.S. Army brigade today might have the firepower and capabilities of an entire division in World War II.
    • Beyond that, it’s important to remember that in the event of a major Russian attack on Ukraine, a major risk would be that China takes advantage of the situation to seize Taiwan.  Today’s U.S. military is much smaller than during the Cold War, so U.S. military leaders must keep a significant part of their force in reserve for action in the Asia-Pacific.
  • On the political front, Ukrainian President Zelensky said he is considering severing diplomatic ties with Russia and begged for Western nations to punish Russia quickly with severe sanctions.  Indeed, the U.S., the U.K., and the EU all appear ready to issue additional sanctions against Russia today, although they are likely to hold back their toughest measures until Russia actually sends troops into Ukraine.  Japan has also signaled it would join the U.S. in imposing sanctions on Russia.  The U.K. has summoned Russia’s ambassador to London and may inform him of the British sanctions at that meeting.
  • The immediate economic and financial implications of a Russian move into Ukraine are obvious.  Global equities pulled back before stabilizing this morning in hopes that the situation won’t worsen much further.  Safe-haven assets like precious metals and government bonds are appreciating sharply, and oil and grain prices are surging.  Energy prices in particular have risen on fears about the impact of Western sanctions that will now surely be imposed on Russia.  German Chancellor Scholz has even announced that the newly finished Nord Stream 2 natural gas pipeline from Russia to Germany will not be certified, at least for the time being.  Those trends could continue as long as the crisis lasts.  Importantly, if the crisis leads to weaker economic activity around the globe, the major central banks could even be forced to abandon their current plans to hike interest rates.
  • There is also some risk of longer-term social fracturing from the crisis.  Since today’s right-wing populists often seem given to appeasement, if not outright fealty, toward Russian-style authoritarianism, it will be interesting to see if they emerge as vocal opponents to U.S. leadership against Russia’s actions in Ukraine, or even worse, as a kind of fifth column supporting Russia here at home.  After eight decades in which hundreds of thousands of Americans have shed their blood in the defense of freedom, democracy, and peaceful prosperity, such a domestic movement would mark a dangerous new cleavage in U.S. society.

Source:  New York Times

U.S. Monetary Policy:  Federal Reserve Governor Michelle Bowman yesterday said she had an open mind over whether the central bank should kick off interest-rate increases next month with a larger half-percentage-point rate rise.  That’s in contrast with statements late last week by other senior Fed officials that downplayed the need for such a large rate hike.  Since investors remain highly concerned about the prospect of tighter Fed policy, the Bowman statement could provide a headwind for equity values today.

U.S. Financial Market Regulation:  After a slow start, financial firms are starting to settle on the Secured Overnight Financing Rate, or SOFR, as the new interest-rate benchmark to replace LIBOR.  New data show SOFR has gained traction since a December 31 deadline that prohibited U.S. banks from issuing new debt tied to LIBOR.

  • The data show that U.S. companies in January sold 61 leveraged loans tied to SOFR, totaling over $66 billion.
  • That is up from only about $3.9 billion raised across four deals in December.

United States-Iran:  The U.S., Iran, and other world powers are reportedly nearing a deal to revive the 2015 agreement limiting the Iranian nuclear program.  Officials involved in the talks say a revised deal could be finalized in the next couple of days.

  • The terms of the new deal would be almost identical to the 2015 pact.  However, because of the expertise Iran has gained through its nuclear work since the U.S. pulled out of the deal in 2018, the country’s breakout time to amass enough nuclear fuel for a bomb could fall to as little as six months compared with about one year in the original deal.
  • Any new deal would involve the U.S. lifting many economic sanctions on Iran.  Although the new agreement could still falter, the prospect that Iran could once again have greater scope for its oil exports will probably put some downward pressure on global oil prices, though not necessarily enough to offset the impact of the Russia-Ukraine crisis.

China:  State-owned banks have cut their mortgage interest rates in Shanghai and Guangzhou.  The rate cuts apparently aim to help arrest the fall in the country’s housing market since the government started clamping down on real estate developers’ debt levels.

Canada:  Police have now completely cleared the massive truckers’ protest against COVID-19 mandates in the capital city of Ottawa, although smaller demonstrations have temporarily disrupted other big cities in the country and at least one U.S.-Canada border crossing.

  • In Ottawa, police said have filed 389 criminal charges related to the protests, made 191 arrests, and towed 79 vehicles to clear downtown streets.
  • The protests have revealed the presence of a potentially destabilizing populist movement in Canada, as in many other major developed countries.  However, the government’s disciplined and largely violence-free approach to ending the demonstrations may provide a template for how officials can take the wind out of those movements going forward.  Importantly, the Canadian government was able to maintain popular support for its effort to end the protests, with the latest polls showing some 70% of Canadians wanted officials to step in and stop the protests.

Global Inflation:  Recent data suggests consumer price inflation is finally accelerating in some Asian countries that had previously seemed immune to the problem.  For example, inflation has now reached 6.0% in India and 3.2% in Thailand.  Because of soaring pork costs, at least one Thai restaurant owner says he has substituted crocodile meat!

COVID-19:  Official data show confirmed cases have risen to  426,339,418 worldwide, with 5,897,563 deaths.  In the U.S., confirmed cases rose to 78,529,492, with 935,992 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 214,745,073, equal to 64.7% of the total population.

  • In the U.S., data continues to suggest that 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 65,861, down 43% from two weeks ago.
  • U.S. health regulators are looking at potentially authorizing a fourth dose of a COVID-19 vaccine in the autumn, according to people familiar with the matter.  The planning is still in the early stages, and authorization would depend on ongoing studies establishing that a fourth dose would shore up people’s molecular defenses that waned after their first booster and reduce their risk of symptomatic and severe disease.
  • In Britain, Queen Elizabeth has been diagnosed with COVID-19.  The 95-year-old monarch, who is believed to be fully vaccinated, has only “mild, cold-like symptoms,” and her life is not considered to be in danger.
  • Even as the Omicron wave continues to peter out in many developed countries, it continues to wreak havoc in Hong Kong.  Reported infections yesterday reached a new record of over 7,500 cases.
    • In addition, an 11-month-old baby became the city’s youngest coronavirus-related fatality, the third such death of a young child in the past fortnight.
    • With infections rising, the government plans to impose further social-distancing rules later this week, including vaccine passports and a rule that restaurants will be limited to just two diners per table, unlike currently where some venues could have up to four people seated together.
    • The city’s top official said all schools would have enforced early summer holidays to run from March to mid-April, with campuses used for testing, isolation, and vaccination as an unprecedented coronavirus outbreak spreads through the city.

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