Daily Comment (June 2, 2021)
by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA
[Posted: 9:30 AM EDT] | PDF
Good morning, all! U.S. equities appear to be headed for a sideways open this morning as investors remain cautious following recent market events in oil and cybersecurity. Today’s report begins with a summary of the cyberattack on the largest meat producer in the world. International news follows, with the OPEC decision on oil production and a new Israeli government. Economics and policy news are up next, including possible friction at the Federal Reserve and the U.S. withdrawal from Afghanistan. China news follows, and we close with our pandemic coverage.
Another cyberattack: A cyberattack on JBS (JBSAY, $12.14), the largest meat producer in the world, forced the company to shut down all of its U.S. beef plants on Tuesday. The attacks started on Sunday and led the company to suspend its North American and Australian computer systems. Although the company announced that most of its plants would be operational by Wednesday, the attack highlights vulnerabilities in the critical infrastructure of the U.S. food supply chain as well as the growing capabilities of hackers.
Cyberattacks have picked up dramatically during the pandemic. There have been 40 publicly reported ransomware attacks against food companies since March 2020. This recent attack comes only weeks after Colonial Pipeline was forced to shut down some of its operations following a hack on its computer system. The rise in these attacks coincides with the increased adoption of cryptocurrency and a decreased level of skills required to carry out these cyberattacks. Although Russian criminal groups have received most of the blame, these types of attacks will likely continue from criminals worldwide as long as computer systems are not updated and cryptocurrencies remain unregulated. In the meantime, the Department of Homeland Security has issued a directive that requires notification from pipeline operators when they are victims of a cyberattack. We suspect other critical industries will also follow this directive going forward. As the pandemic fades out of public focus, we expect cryptocurrencies will receive more scrutiny as it is becoming apparent that the semi-anonymous payment system poses severe national security risks.
International news: OPEC will slowly increase its production, Russia is looking to add more military units, and Benjamin Netanyahu is possibly out as Prime Minister.
- OPEC and its allies agreed to increase their production of crude oil slowly as demand starts to pick up. The group expects this approach will allow prices to remain elevated as countries recover from the pandemic. The forecast calls for inventories to fall below the average 2015-2019 levels by the end of the month, which should be bullish for oil prices.
- Peru is going to choose its fourth president in less than a year on June 6. The frontrunner, Pedro Castillo, is considered to be a Marxist with nationalist views.
- The Russian military will build an additional 20 units to counter the rising NATO threat in its region.
- Prime Minister Benjamin Netanyahu’s reign could end on Wednesday. A cross-party coalition, including members from the far-left and far-right, has made an agreement to form a government that would replace Netanyahu with Naftali Bennet, a tech billionaire who is to the right of Netanyahu politically.
Economics and policy: STL Fed President James Bullard and Federal Reserve Governor Lael Brainard offered opposing views on the labor market, the Afghanistan withdrawal continues to progress ahead of schedule, and the U.S. Chamber of Commerce wants to increase the number of work visas.
- The U.S. Chamber of Commerce, a pro-business lobby group, is pushing for a reform of employment-based visas as a way to address the labor shortage. The group would like lawmakers to double the cap on employment-based and H-1B visas.
- Louis Fed President James Bullard told the Financial Times that he believes the labor market may be tighter than it looks. He has stated that even though payrolls are lagging behind pre-pandemic levels, other measures such as unemployment-to-job openings indicate the labor market is favorable. Although he does not have a vote, his view may be shared by other FOMC members.
- Federal Reserve Governor Lael Brainard argued that the labor market is far from achieving the Federal Reserve’s target for employment and has maintained that she is keeping an eye on inflation.
- The Biden administration is expected to put a freeze on oil and gas leases in the Arctic National Wildlife Refuge pending a review of its environmental impact.
- Israel plans to request $1 billion in emergency military aid as it tries to rebuild its armed forces following its skirmish with the Palestinians.
- President Biden plans to address the racial wealth gap through government grants, small business loans, and other programs.
- The U.S. Supreme Court ruled that it will not hear an appeal from Johnson & Johnson (JNJ,$165.53) over a judgment that requires it to pay $2 billion in settlement claims.
- The U.S. is nearly halfway to achieving full withdrawal from Afghanistan. The U.S. Central Command estimates that it has completed about 30% to 44% of the drawdown process. U.S. forces are expected to hand over its main Bagram Air Base to Afghan forces in roughly 20 days.
China: Malaysia seeks answers from China, and rising costs and power shortages are hurting manufacturing production.
- Malaysia will summon the ambassador of China for an explanation regarding why 16 Chinese air force planes flew through its airspace. The flight comes amid increasing tensions over the South China Sea.
- The Chinese-backed Asian Infrastructure Investment Bank has left the door open for investing in Myanmar. Although it currently doesn’t have any open projects with the country, it has expressed a willingness to work with any “de facto governments.”
- The rising costs of materials has caused problems for solar panel makers in China. Polysilicon, the main component of panels, has quadrupled in price in recent months.
- The surge in manufacturing production has caused power shortages throughout the country. Some factories have been asked to close down for several days a week in order to conserve energy.
COVID-19: The number of reported cases is 171,021,130 with 3,556,992 fatalities. In the U.S., there are 33,286,129 confirmed cases with 595,205 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The FT has also issued an economic tracker that looks across countries with high-frequency data on various factors. The CDC reports that 366,317,045 doses of the vaccine have been distributed with 296,404,240 doses injected. The number receiving at least one dose is 168,489,729, while the number of second doses, which would grant the highest level of immunity, is 135,867,425. The FT has a page on global vaccine distribution.
- Moderna (MRNA, $184.66) applied for full approval of its COVID-19 vaccine on Tuesday. The vaccine has only been authorized for emergency use. If it is approved, Moderna would be allowed to market the vaccine directly to consumers.
- A new digital vaccine passport has become popular in New York and has made it easier for vaccinated people to attend events. Although paper passports are recognized as valid proof of vaccination, digital passports are more convenient.
- The World Health Organization plans to label new variants of the COVID-19 virus using the Greek alphabet.
- The United Kingdom had its first day without a COVID-19-related death on Tuesday, raising the likelihood of easing restrictions.