Daily Comment (February 7, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with news that yesterday’s earthquakes in Turkey have closed a major oil exporting terminal, pushing up global prices.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including news that the next head of the Bank of Japan is likely to be just as dovish as the current chief and indications that the Republican Party may be moving toward raising taxes on big U.S. corporations.

Global Oil Supply:  Yesterday’s big earthquakes in Turkey have closed a major oil terminal on Turkey’s southern coast, pushing up global oil prices today.  The Ceyhan terminal is the main hub for oil exports from Azerbaijan (620,000 bpd of Azeri oil last month) and Iraqi Kurdistan (350,000 bpd last month).  We’ve seen no firm estimates as to when the terminal might begin operating again, but the shutdown has contributed to a jump of approximately 1.5% in global oil prices so far this morning.  Brent crude oil is currently trading at about $82.50 per barrel.

Japan:  Prime Minister Kishida’s government has reportedly asked the Bank of Japan’s Deputy Governor Masayoshi Amamiya to become the central bank’s top leader when Haruhiko Kuroda, the current governor, retires in early April.  BOJ observers widely consider Amamiya to be a continuity candidate who will maintain Kuroda’s dovish approach to policy.  In response, the JPY weakened to its lowest value since early January.

Australia:  The Reserve Bank of Australia hiked its benchmark short-term interest rate today for the ninth consecutive time, boosting it by 25 bps to 3.35%.  RBA Governor Philip Lowe said the hike was needed to bring down inflation and signaled that further rate hikes were likely.  Along with last week’s rate hikes by the U.S. Federal Reserve, the European Central Bank, and the Bank of England, the hike in Australia underscores that the major central banks in the developed world remain in rate-hiking mode and that investors looking for a quick pivot to rate cuts are probably being too optimistic.

France:  Key labor unions are launching a new nationwide strike today to protest President Macron’s proposed pension reform, which would raise the standard retirement age to 64 from the current 62.  Just as important, opposition parties in parliament have introduced a blizzard of some 20,000 proposed amendments to the legislation in order to slow its progress.  The latest polling shows that only about 35% of French citizens support the bill, raising serious questions as to whether Macron can push it through with his lack of a majority in the legislature.

Russia-Ukraine War:  Reports indicate that Russian forces have now opened new offensives in at least five places on the front lines in eastern Ukraine, but Western officials and analysts are casting doubts on Kyiv’s assertion that this is the beginning of a major strategic push that could put Ukrainian gains at risk.  The Western officials and analysts continue to believe that Russia’s depleted troops, equipment losses, and ammunition shortages will limit its ability to launch any large, effective combined operations in the near future.

  • The war also continues to pressure the West’s defense industry, as it tries to rapidly ramp up the production of weapons and ammunition in support of Ukraine.
  • The pressure on producers is being exacerbated by lingering supply chain bottlenecks after the coronavirus pandemic, a lack of production capacity, and a shortage of critical raw materials for some explosives, which is holding back efforts to increase output.

United States-China:  Several U.S. Navy warships, with divers and FBI counterintelligence officials on board, continue to comb the Atlantic Ocean off the coast of South Carolina for the remains of the suspected Chinese spy balloon shot down on Saturday.  If landing in the water kept the balloon’s instruments relatively intact, U.S. officials could figure out what the Chinese were looking for, better understand Chinese surveillance technology, and determine whether their sensors use any computer chips or other high-technology components from the U.S. or its allies.  Those findings could worsen the spiral of tensions between the two countries and create further risks for investors.

U.S. Tax Policy:  In an interview with the Wall Street Journal, the new Republican chairman of the House Ways and Means Committee, Jason Smith of Missouri, vowed to champion tax policies that prioritize the interests of farmers, small businesses, and working-class voters, rather than the big corporations his party has often favored in the past.  He also warned that he may launch investigations into the economic ties between big corporations and China.

  • Smith’s shift in priorities is consistent with our view that the Republican Party, under the increasing influence of populists on the right wing of the party, is becoming less friendly toward big, international businesses. If the Republicans continue to strengthen, that could eventually translate into big tax increases and other populist attacks on multinational corporations.
  • In contrast, the Democratic Party is becoming increasingly identified with big business, especially in sectors such as information technology, financial services, communications services, and media.

U.S. Politics:  President Biden will deliver his State of the Union address tonight at 9:00 pm ET.  In the speech, he is expected to tout his legislative wins last year and lay out policy priorities for the coming year.  Biden’s new policy priorities are expected to include a quadrupling of the 1% tax on stock buybacks that took effect in January and expanding a recent $35-a-month cap on insulin for Medicare recipients.  He is also expected to call for a  reduction in the federal budget deficit  “through additional reforms to ensure that the wealthy and the largest corporations pay their fair share.” Finally, Biden may lay out some tough new measures against China, given that he is facing political pressure to retaliate against the country for sending a spy balloon over the U.S. last week.

U.S. Power Grid:  Two Neo-Nazi activists have been arrested on charges that they conspired to damage electrical substations in the Baltimore area to cause mass energy outages.  Recent attacks on substations elsewhere have raised concerns about sabotage from Russia, China, or other state actors, but the arrests are a reminder that the electrical grid may be more vulnerable to homegrown terrorists.

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