by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Our Comment today opens with updated oil demand and supply forecasts from the International Energy Agency. We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including more signs of faltering Western investment in China and a preview of today’s Federal Reserve decision on interest rates.
Global Oil Market: In its monthly report, the International Energy Agency raised its 2023 forecast for global crude oil demand to 102.2 million barrels per day, an increase of 2.4 mbpd from 2022. The organization also raised its 2023 supply forecast to 101.3 mbpd, suggesting a tight market that could mitigate some of the downward pressure on oil prices as the U.S. and other major economies post weaker economic growth or look set to enter recession. So far this morning, Brent crude is trading up approximately 0.7% to $74.80, but that remains far below the level of almost $120 per barrel one year ago.
China – Inbound Portfolio Investment: In the latest sign that Western investors are losing their appetite for Chinese assets, U.S. investment banks such as Goldman Sachs (GS, $342.50) have reportedly been pulling out of initial public offering deals involving companies based in China. Even when the investment banks take part in a Chinese IPO, reports indicate they are sometimes having trouble selling the deals. As we have often argued, geopolitical tensions between China and the West, along with slowing Chinese economic growth, have raised the risks involved with investing in China. It is now becoming increasingly clear that investors are responding to those risks.
China – Monetary Policy: The People’s Bank of China cut another set of policy interest rates yesterday, following its earlier cut in its seven-day reverse repo operations. This time, the central bank cut the rate on its overnight Standing Lending Facility to 2.75% from the previous 2.85%. The institution also cut its SLF rate for other maturities. The rate cuts have spurred expectations of more monetary easing in the coming weeks.
- Separately, top officials are also reportedly considering a broad economic stimulus program that would help areas such as personal consumption and real estate.
- Nevertheless, it is not clear if President Xi would be willing to abandon his plans to rein in debt and other economic imbalances engendered by the government’s past stimulus programs.
European Union: The European Commission today issued fresh antitrust charges against Google (GOOG, $124.43), alleging that the company illegally distorts competition in the bloc’s advertising technology sector. The document includes a call for Google to divest some of its online advertising business. The charges illustrate how major U.S. technology firms continue to face heightened regulatory risks, both in the U.S. and in Europe.
- Separately, the European Parliament today advanced a draft law called the AI Act that aims to impose the West’s first comprehensive regulation of artificial intelligence. If passed into law, the legislation would:
- Regulate how companies train their AI models to ensure the models don’t create illegal content.
- Require companies to publish summaries of the copyrighted data used to train their models, potentially giving content creators a way to share in their profits.
- Require companies to disclose when content is generated using AI.
North Atlantic Treaty Organization: Members of the NATO military alliance are struggling to agree on a successor to Secretary General Jens Stoltenberg when his term ends in October. As a result, the members are leaning toward extending the former Norwegian prime minister’s mandate for a fourth time. That would not only allow more time for the NATO members to agree on a new leader, but it would also allow for some continuity in the midst of Russia’s invasion of Ukraine.
- Separately, reports indicate the U.S., the U.K., Germany, and France are drafting a multilateral political declaration that would allow individual countries to provide bilateral security assurances to Ukraine in lieu of NATO membership.
- However, neither the framework document nor the bilateral agreements would have the status of legal treaties. They also would not involve any formal NATO commitments.
Russia-Ukraine War: Speaking of the war, yesterday Russian President Putin publicly backed Defense Minister Shoigu’s demand that the Wagner Group of mercenaries be brought under central control. Wagner chief Yevgeniy Prigozhin has so far refused to do so, but Putin said formalizing Wagner’s relationship to the Defense Ministry would be necessary to ensure veterans’ benefits for the mercenaries—an argument that likely aims to undermine Prigozhin’s popularity with his troops and short-circuit his political ambitions.
United States-Iran: Reports today say the Biden administration has quietly restarted indirect talks with the Iranian government in a bid to ease tensions. After giving up last November on its effort to reinstate the international agreement limiting Tehran’s nuclear program, the administration now appears to be seeking better behavior from Iran through talks and the easing of some international financial flows that had been frozen by U.S. sanctions.
U.S. Monetary Policy: Officials at the Fed today wrap up their latest policy meeting, with their decision due to be released promptly at 2:00 PM EDT. Market indicators suggest investors now expect the policymakers to pause their interest-rate hikes and keep the benchmark fed funds rate steady within a range of 5.00% to 5.25%. The officials are also expected to signal an option to resume their rate hikes in the future if consumer price inflation doesn’t moderate as expected.
U.S. Military Leadership: In a surprise move, Defense Secretary Austin has recommended U.S. Pacific Fleet Commander Samuel Paparo to be the new Chief of Naval Operations. The move was a surprise because Austin had been widely expected to name the current Vice CNO, Admiral Lisa Franchetti, to be the Navy’s top officer. President Biden will have final word on the matter, but Austin’s support for Paparo suggests that growing U.S.-China tensions have put a premium on top-level experience in the Pacific theater, even if that means missing a chance to name the first female leader of the Navy and the first female member of the Joint Chiefs of Staff.
U.S. Defense Industry: Defense giant Lockheed Martin (LMT, $452.37) and semiconductor maker GlobalFoundries (GFS, $62.89) announced a deal that will secure the supply of computer chips used in Lockheed’s weapons in return for investments in new GlobalFoundries production capacity. The agreement will also help make GlobalFoundries eligible for capacity funding from last year’s CHIPS and Science Act. The deal serves as a reminder that the legislation aims to spur domestic production of not only advanced computer chips, but also the less-advanced chips used in military equipment.
U.S. Labor Market: Officials in the Biden administration have started trying to ease tensions between the West Coast dockworkers’ union and port employers, who have been struggling to agree on a new labor contract for the last year. With patience wearing thin on both sides, the dockworkers have reportedly begun to stage informal work slowdowns, raising the risk of broader disruptions or even an outright strike that would snarl supply chains and potentially boost inflation again.