Daily Comment (January 19, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
Today, our Comment begins with remarks regarding yesterday’s market volatility. We next provide an update on the tensions at the Russia-Ukraine border. We then cover a few U.S. and international news items that have the potential to affect the financial markets today, and we wrap up with the latest developments related to the coronavirus pandemic.
Global Financial Markets: Although early morning transactions suggest financial markets will be better behaved today than they were yesterday, some trends remain in place. Investors continue to bid down bond prices on expectations for higher policy rates to combat inflation pressures. The yield on Germany’s ten-year Bund rose above 0% for the first time in 30 months, ending at 0.01%. In the U.K., the yield on ten-year Gilts hit its highest level since March 2019, after data showed inflation in the country reaching a 30-year high (see data tables below). In the U.S., the yield on the ten-year Treasury note is edging higher past 1.85%.
- In an interview with the Financial Times, Bundesbank Vice President Claudia Buch warned that German banks are becoming too complacent about the risk of borrowers defaulting and the potential for interest rates to rise, particularly in the country’s booming mortgage market.
- Even cryptocurrencies have taken a hit from expectations for higher interest rates. The biggest cryptocurrencies have lost as much as 14% of their value so far this year.
- Illustrating the unease about inflation and the prospects for aggressive central bank action to fight it, some investors are reportedly now thinking the Federal Reserve could impose a 50-basis point hike at its policy meeting in March.
- We still think the Fed and other central banks will have to pull their punches before hiking rates as far as the market believes. We believe tighter policy could quickly expose financial fragilities somewhere in the economy or begin to weigh on real economic activity, even as today’s high inflation rates start to moderate because of more favorable “base effects” and supply disruptions get resolved. High financial market volatility, with the VIX over 20 (as it is today), has also typically discouraged the Fed from further policy tightening. In the meantime, however, financial markets will remain susceptible to bouts of volatility.
Global Energy Markets: In its monthly report, the International Energy Agency hiked its forecast for global oil demand this year to 99.7 million barrels per day, up 3.3 million bpd from 2021. That would mean that oil demand this year will finally surpass the 99.5 million bpd registered before the pandemic in 2019.
- According to the IEA, the higher forecast reflects growing coronavirus immunization rates and fewer economic lockdowns despite the fast spread of the Omicron mutation.
- The forecast will likely feed into concerns about high inflation this year, even though the IEA projects global oil supply will exceed demand by a narrow margin.
Russia-Ukraine: As of this writing, President Putin still has not unleashed the dogs of war against Ukraine, giving the U.S. and its European allies additional time to pursue diplomatic and security measures to stop the threatened attack.
- On the diplomatic level, U.S. Secretary of State Blinken today is meeting Ukrainian President Zelensky and Foreign Minister Kuleba in Kyiv, demonstrating the U.S. commitment to Ukraine’s sovereignty. Tomorrow, Blinken will travel to Berlin to confer with German Foreign Minister Baerbock, who met with Zelensky in Kyiv earlier in the week and then visited Russian officials in Moscow yesterday. Blinken’s meeting in Berlin will also include the foreign ministers of France and the U.K. Finally, Blinken is scheduled to meet with Russian Foreign Minister Lavrov in Geneva on Friday.
- Separately, U.S. officials said the Biden administration would impose financial sanctions on four Ukrainian officials known to have supported the country’s pro-Russian separatists. Since the sanctions would put indirect pressure only on Russia, they are seen as an effort by the administration to thread the needle between imposing costs on Moscow and not closing the door to diplomacy.
- Reporting in recent days suggests the U.S. has also backed off the idea of cutting Russia out of the SWIFT dollar transfer system in the event of a Russian attack, in part because of discomfort among European governments. With their proximity to Russia and close trade ties with the country, the Europeans are also struggling to decide how to respond if Russia launches non-military aggression on Ukraine, such as a cyberattack.
- Despite the diplomatic efforts and sanction threats, Putin continues to send threatening signals. The most important move over the last few days has been the opening of joint Russian-Byelorussian military exercises in Belarus. The forces gathered there could conceivably cross the Byelorussian-Ukrainian border, supporting an offensive crossing from Russia into Ukraine.
Kazakhstan: Russia’s ambassador to Kazakhstan, Aleksey Borodavkin, and Russian General Andrei Serdyukov, who led the Collective Security Treaty Organization’s Russian-led “peacekeeping” mission in Kazakhstan this month, said the operation is now over and that “all” CSTO troops had left the former Soviet republic.
U.S. Antitrust Policy: The Department of Justice and the Federal Trade Commission yesterday announced they are seeking input from the public on a major overhaul of merger and takeover rules designed to improve competition in the economy. The announcement marks the first step in a shake-up of antitrust rules and enforcement policy that President Biden called for last year.
U.S. Insurance Market: Two of the biggest insurance companies offering home insurance for multimillion-dollar properties in California say they will stop offering coverage in the state, citing the rising risk of wildfires and tough state regulations.
United Kingdom: As Prime Minister Johnson continues to face a potential no-confidence vote over his pandemic “bring your own booze” garden party scandal, the anger within his own Conservative Party has prompted a right-wing member of parliament, Christian Wakeford, to defect to the Labour party. That marks the Tories’ first defection to the Labour Party in 15 years.
Turkey-United Arab Emirates: Turkey and the UAE, formerly archrivals, have signed a swap agreement that will boost Turkish foreign currency reserves by almost $5 billion. The deal is only the latest in a succession of swap agreements Turkey has signed to shore up its dwindling reserves. It is not expected to provide any significant support for the lira since analysts typically strip out borrowed funds when assessing a country’s foreign currency holdings.
Afghanistan-Pakistan: Even though Pakistani Prime Minister Khan welcomed the Taliban’s takeover of Afghanistan last summer, he’s now finding that their victory has unleashed hardline Islamist sentiment that is difficult to control. Apart from the border tensions, these range from surging violence by emboldened domestic extremists to a growing political challenge from Pakistani Islamist parties who identify with the Taliban’s views.
COVID-19: Official data show confirmed cases have risen to 334,541,052 worldwide, with 5,557,369 deaths. In the U.S., confirmed cases rose to 67,598,609, with 854,076 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 have received at least their first shot totals 249,393,487. The data show that 75.1% of the U.S. population has now received at least one dose of a vaccine, and 63.0% of the population is fully vaccinated.
- Today, the Biden administration is officially launching its new website for ordering free COVID-19 tests. The site, covidtests.gov, will link people to an order form on the U.S. Postal Service website.
- There is a limit of only one order for four tests per address.
- People can provide an email address to receive updates on the order.
- The free tests are expected to start shipping in late January, according to the USPS website, and would usually be sent out within seven to 12 days of ordering.
- The administration is also expected to announce plans to make 400 million N95 masks available free at pharmacies and community health centers across the country. The masks should be available at pharmacies and community health centers late next week, and the program will be fully up and running by early February.
- An Israeli study found that a fourth shot of the vaccine from Pfizer (PFE, 54.11) and BioNTech (BNTX, 169.23) was largely ineffective in stopping Omicron infections despite boosting antibodies. The news is likely to be welcomed by those worried about the need for more and more shots beyond a mere booster.
- Pfizer said three different lab tests showed that its oral antiviral pill Paxlovid is effective against the Omicron mutation. The study results haven’t yet been peer-reviewed, but if they are confirmed, the easily administered drug will probably become an important treatment that can keep people from becoming seriously ill or dying from COVID-19.