Daily Comment (January 31, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

In today’s Comment, we open with the latest developments in the Russia-Ukraine crisis, which will be discussed today at the United National Security Council meeting.  We next turn to U.S. news, including a preview of this week’s confirmation hearing for economist Philip Jefferson to join the Federal Reserve’s Board of Governors.  We next cover a range of international news that has the potential to affect the financial markets today.  We close with the latest on the coronavirus pandemic.

Russia-Ukraine-NATO:  While Russia continues to threaten Ukraine with more than 100,000 troops poised along its borders, the UN Security Council will meet today in an effort to diffuse the situation.  Meanwhile, U.S. senators are nearing the completion of a bill that would provide for major sanctions in the event of an attack.   If it passes Congress and is signed into law, the bill will target large Russian banks, hit Russians’ savings and pensions, and limit the market for Russia’s sovereign debt, among other elements.  Ukraine’s ambassador to the U.S. insisted that Kiev and Washington are on the same page regarding the threat from Russia, despite press reports that some Ukrainian officials worry the U.S. is overstating the likelihood of an invasion.

  • U.S. officials continue to highlight their threat to impose economic sanctions against Russia and key Russian officials in the event of an invasion.  They maintain assurances that the U.S. will not be sending troops to fight on Ukrainian soil.  However, there is more of a military threat here than meets the eye.  Importantly, the Biden administration has also stressed that if Russia invades Ukraine, the U.S. and NATO will boost their military infrastructure and deployments in Eastern Europe, close to Russian borders, and bolster their military aid to Ukraine as well.  In this sense, it’s not entirely accurate to say that the U.S. and NATO have vowed to limit their response to economic sanctions.
  • As if to reinforce the idea that the U.S. and NATO would respond by increasing their military presence in Eastern Europe, British Prime Minister Johnson said over the weekend that the U.K. was prepared to massively boost its troop presence on the Continent “next week” if needed to deter Russia.  More broadly, Russia’s threatening stance could prompt many European nations to finally increase their defense spending and strengthen their military forces over the longer term.
  • If the U.S. and NATO really do boost their military presence in Eastern Europe, it would mark a significant strategic mistake for Russian President Putin.  It may be why some Russian officials have recently taken a relatively conciliatory stance to last week’s U.S. and NATO responses to Russian security demands.  An invasion or other serious attack on Ukraine still doesn’t seem to be set in stone.  Naturally, if tensions cool, it would likely give a boost to global risk markets and help cool some commodity markets that have risen due to the potential for war, such as the market for wheat.

U.S. Monetary Policy:  On Thursday, the Senate will hold a confirmation hearing on President Biden’s nomination of Philip Jefferson for a seat on the Fed’s board of governors.  Although the economist has focused his research on how economic policy affects social groups differently, a number of current and former colleagues are making the argument that he is apolitical and would be open to hiking interest rates in order to rein in inflation.

U.S. Storm Impacts:  Damage from the weekend’s winter storm in the Northeast didn’t appear to be extensive for a storm of such magnitude, in part because people were generally off the roads during the height of the storm on Saturday. In addition, the snow was light and fluffy, which limited damage to power lines and trees.

Italy:  The country’s parliament voted to re-elect President Sergio Mattarella as head of state, rather than promoting Prime Minister Mario Draghi to the position.  That means Draghi will continue to head Italy’s broad unity government until early 2023, giving the country a welcome period of political stability that is likely to be positive for the Italian economy and financial markets.

Portugal:  The ruling Socialist Party won yesterday’s parliamentary election with an absolute majority after voters penalized the far-left parties that triggered the snap poll.  With only a few votes still to be counted, the Socialists should win at least 117 seats in the 230-seat parliament, promising a period of stable policy.  Prime Minister Costa has signaled he will continue to focus on reining in the country’s budget deficit.

Yemen-United Arab Emirates:  The UAE said it shot down a missile fired at it by Iran-backed Houthi rebels in Yemen, marking the third such attack in recent weeks.  The attack happened as Israeli President Herzog was in Dubai for the Expo 2020 world’s fair.  According to the UAE’s defense ministry, the missile was destroyed over an unpopulated area and caused no casualties.

Digital Currencies:  Following up on the IMF’s warning last week that El Salvador should stop recognizing bitcoin as legal tender, the head of the organization’s monetary and capital markets department warned that the use of cryptocurrencies in place of traditional currencies poses “immediate and acute risks” for many emerging markets.  In particular, the official highlighted the destabilizing effect of the currencies’ huge price swings and their use to yank capital out of weak economies.

  • The IMF’s stance on digital currencies supports our view that they face significant regulatory risk, especially as they present challenges to national sovereignty.  Over time, central bank digital currencies are more likely to survive and develop.  At least in Japan, however, there is still some pushback against the idea of CBDCs.
  • Separately, the world’s first exchange-traded fund dedicated to decentralized finance networks is due to launch in Brazil on February 17.  The Hashdex DeFi Index ETF will allow investors to track a basket of projects betting on decentralized trading and lending networks whose standards are automated and often decided by consensus.

COVID-19:  Official data show confirmed cases have risen to  375,281,990 worldwide, with 5,665,683 deaths.  In the U.S., confirmed cases rose to 74,333,528, with 884,265 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 211,695,131 , equal to 63.8% of the total population.


  • The seven-day average of U.S. hospital patients with confirmed or suspected COVID-19 infections fell to 146,769 over the weekend, about 8% lower than the peak on January 20.  The data suggest stress on the healthcare system from the fast-spreading Omicron mutation is now easing rapidly.
    • Despite the decline in hospitalizations, deaths continue to rise, with the seven-day average of new COVID-19 deaths now standing at an 11-month high of almost 2,400 per day.
    • Even though Omicron is much less virulent than earlier mutations, the sheer number of infections with the variant is boosting total deaths.

 Economic and Financial Market Impacts

  • In China, where the government’s strict zero-COVID policy has prompted lockdowns against Omicron outbreaks around the country, the official January PMI for the manufacturing sector fell to 50.1 from 50.3 in December.  The January Caixin PMI for manufacturing, more heavily weighted toward the private sector, fell all the way to 49.1, marking its lowest reading since February 2020.  Meanwhile, the official nonmanufacturing PMI, which includes both services and construction activity, fell to 51.1 in January from December’s 52.7.
    • All three indexes are designed so that readings over 50 will point to expanding activity.
    • Taken together, the figures suggest the government’s strict response to the Omicron outbreaks is proving to be a big headwind for the economy.  That is likely to weigh on overall global economic activity and financial markets in the coming months.

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