Daily Comment (February 6, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with a few words on last week’s Chinese spy balloon incident and Chinese support for Russia’s war in Ukraine, which together are likely to worsen the spiral of tensions between the U.S. and China and put investors at risk.  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 Russia-Ukraine war and how it is creating new energy opportunities for Algeria.

United States-China-Russia:  Customs records obtained by national security nonprofit C4ADS show that Chinese defense companies have been providing Russia with a range of dual-use civilian/military goods needed by the Kremlin to prosecute its invasion of Ukraine.  The products supplied include semiconductors, navigation equipment, jamming technology, and fighter-jet parts.  We suspect the report will spur the U.S. to impose sanctions on more Chinese firms, exacerbating U.S.-Chinese tensions even beyond that of the impact of Saturday’s U.S. shoot-down of the Chinese surveillance balloon identified early last week.

Russia-Ukraine War:  While the front lines from northeastern to southern Ukraine remain mostly static, the Russians finally appear close to encircling the eastern city of Bakhmut.  The new Russian gains partly reflect the availability of tens of thousands of new troops mobilized in President Putin’s September call-up.

European Union-Algeria:  With Algeria emerging as one of the key natural gas sources available to replace Russian exports to Europe, U.S. energy giant Chevron (CVX, $169.45) has revived talks with the Algerian state-run company Sonatrach to investigate natural-gas opportunities in the country’s vast shale formations.  The potential for reinvigorated shale development illustrates how the Russia-Ukraine war has shifted global energy markets and created new opportunities for some countries.

European Union-Indonesia-Malaysia:  The impending approval of a new EU law against importing products linked to deforestation has spurred Indonesia, Malaysia, and other East Asian countries to threaten cutting off palm oil exports to the bloc in protest.  Other emerging markets are likely to be affected and could protest as well, given that the law could affect a wide range of products, such as cattle, cocoa, coffee, palm oil, soya, wood, and rubber.

United Kingdom:  Over the weekend, Former Prime Minister Truss launched a concerted effort to rehabilitate herself politically with a 4,000-word essay in The Telegraph, a newspaper widely read by members of her Conservative Party.  In the article, Truss lashes out at a number of enemies, arguing that her proposed program of massive tax cuts was brought down by disloyal Conservatives and the “economic establishment.”  Truss may find a sympathetic audience among some Conservatives, which will complicate matters for incumbent Prime Minister Sunak as he struggles to deal with Britain’s current wave of strikes and rising financial pressures.

Israel:  Violence continues to escalate between the Israeli government and militant Palestinians.  Earlier today, Israeli forces said they killed five Palestinian militants during an operation targeting Hamas members near Jericho.  It was the second such deadly raid in a little over a week as violence escalates in the occupied West Bank.

Turkey:  At least two major earthquakes struck southern Turkey this morning, killing at least 1,000 and probably many more.  The quakes, which registered 7.8 and 7.5 on the Richter scale, were Turkey’s strongest in some 80 years.  The loss of life, economic disruptions, and future government response could potentially affect President Erdoğan’s re-election prospects at the next balloting in May.

U.S. State Fiscal Health:  In another sign that any recession this year is likely to be moderate, the National Association of State Budget Officers said state governments have about $136.8 billion set aside in financial reserves, a record high of 0.53% of GDP.  County and city governments also appear flush with cash, which should limit how much they will have to tighten their spending in the event of an economic downturn.

U.S. Labor Market:  Despite the surprising growth in overall payrolls reported on Friday, the information technology and real estate-related industries continue to shed workers.  Earlier today, Dell Technologies (DELL, $42.24) announced it that would lay off 5% of its workforce, which will equate to about 6,600 employees.  The company blamed the move on “eroding” market conditions.

  • Despite the continued layoffs in technology and real estate, other employers’ panicked scramble for workers and rising wage offers could spur the Federal Reserve to keep raising interest rates even beyond what it had previously signaled.
  • The risk that wage growth will keep buoying inflation and interest rates not only weighed on financial markets last Friday, but it continues to affect the markets today. So far this morning, stock futures are falling, bonds are in retreat, and the dollar is strengthening.

U.S. Childcare Industry:  One industry that hasn’t been able to hire back all the workers it lost during the COVID-19 pandemic is childcare.  According to the most recent data, there are now about 58,000 fewer daycare workers in the U.S. compared with February 2020, just before the pandemic took hold.  The worker shortage is limiting daycare availability and driving up costs.

U.S. Housing Industry:  Now that mortgage interest rates have fallen back to around 6% from their peak of 7% last November, real estate professionals report there is some thaw in the housing market.  However, it is still too early to know whether the market will continue to improve from here, especially given that the tight labor market could keep the Fed hiking interest rates beyond what investors had recently been expecting.

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