Daily Comment (March 1, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
We begin today’s Comment with an update on the Russia-Ukraine war. The biggest development is that Russia seems poised to intensify its attacks and broaden them to include indiscriminate volleys against civilians. We next review a number of global, international, and U.S. developments that could affect the financial markets today. We conclude with the latest news related to the coronavirus pandemic.
Russia-Ukraine: Russian and Ukrainian officials met yesterday to discuss a ceasefire, but reports suggest they only made marginal progress and plan to meet again later this week. In the meantime, it appears that Russian President Putin has ordered a step-up in attacks, with intense shelling of Ukraine’s second-largest city, Kharkiv, and intelligence reports of a massive column of Russian reinforcements heading toward the capital and biggest city, Kyiv.
- At the ceasefire talks, the Kremlin later said it demanded that Ukraine recognize Russia’s 2014 annexation of its Crimean Peninsula and commit to neutrality, demilitarization, and “de-Nazification” of the country. The Kremlin’s continued insistence on such demands would suggest that Putin is still far from ready to reach a compromise. As evidence of Putin’s plan and expectations for a quick victory, analysts looking into the archives of Russian propagandistic media site RIA Novosti have reportedly discovered an article on the “victory” in Ukraine that was to have been published on February 26. Key quotes in the article are:
- “Ukraine has now returned to Russia. This does not mean that its statehood will be liquidated, but it will be reorganized, re-established, and returned to its natural state as a part of the Russian world.”
- “Did anyone in the old European capitals, in Paris and Berlin seriously believe that Moscow would give up Kyiv? That the Russians will forever be a divided people?”
- “The operation in Ukraine is Russia returning its historical space and place in the world.”
- “Russia has not only challenged the West—it has shown that the era of global Western domination can be considered fully and completely over.”
- “The new world will be built by all civilizations and centers of power—naturally, together with the West (united or not)—but not on the Western terms or according to its rules.”
- In a sign that Russia has achieved true international pariah status, even traditionally neutral Switzerland has joined the various democratic countries that have sanctioned Russia for its invasion. The Swiss government says it will match the EU’s sanctions against Moscow. The EU has also extended its sanctions on the Russian elite by freezing the assets of more than half a dozen of the country’s most prominent oligarchs, many of them with close ties to President Putin. They also imposed a travel ban on these individuals.
- On the economic front, Western companies continue to distance themselves from Russia in various ways. For example, Netflix (NFLX, $394.52) said it will not add any Russian channels to its service in the country despite a regulation that would require the streaming giant to carry several state-run broadcasters beginning today. Separately, British-Dutch oil giant Shell (SHEL, $52.39) said it would end all three of its joint ventures with Kremlin-backed Gazprom (OGZPY, $3.07), including its 27.5% stake in the vast Sakhalin-2 liquefied natural gas project.
- We’ve also seen signs that some Western companies have been caught flat-footed and are likely to face unexpected pain from the sanctions on Russia. Citigroup (C, $59.23) disclosed yesterday that it had nearly $10 billion in total exposure to Russia at the end of 2021, some of which sit in a consumer bank it has been trying to sell and may now be stuck with. Among big U.S. banks, that makes Citi by far the one most exposed to Russia, although the country still is only a small part of Citi’s $2.29 trillion in assets.
- Meanwhile, global shipping has already been disrupted by the war and its fallout.
- Prices for crude oil, natural gas, and wheat continue to rise in response to the war, even though those commodities are largely exempt from the associated Western sanctions.
- Amid growing concern over energy supplies, the U.S. and other major oil-consuming nations are considering releasing 70 million barrels of oil from their emergency stockpiles. Members of the International Energy Agency could agree as early as today to tap their strategic reserves, including up to 40 million barrels of mostly light grades from the U.S.
- The U.S. has reportedly informed Saudi Arabia of the move to ensure that the de facto leader of the Organization of the Petroleum Exporting Countries would not react by interrupting planned production increases.
- Of course, the war and the Western sanctions against Moscow still threaten to be most painful for Russia. The sanctions are the economic equivalent of “blasting Russia back to the stone age,” or perhaps transforming the Russian economy into something like a really, really big North Korea. Fortunately, the U.S. economy looks like it has enough momentum to weather the impact of the sanctions reasonably well.
Global Dividend Stocks: According to a widely followed report on dividend payouts, the growth in total global distributions was expected to moderate to about 3% in 2022 from a whopping 17% in 2021. However, the Russia-Ukraine war is now expected to slow this year’s growth rate even more.
Global Supply Chains: In yet another blow to global supply, Toyota Motor (TM, $182.95) said a computer virus at one of its suppliers will force it to close all 14 of its plants in Japan until Wednesday. The shutdown adds to the difficulties of a global semiconductor shortage that forced Toyota’s factories to operate below full capacity for much of the past year. It could add to the global supply shortages that have driven up consumer inflation and prompted major central banks to plan on interest-rate hikes.
United States-Taiwan: One obvious question from the Russo-Ukrainian War is what it means for the U.S.’s commitment to defend Taiwan from Chinese aggression. To send a message of reassurance and remind China not to step up pressure on Taipei while the U.S. focuses on Eastern Europe, the White House has sent a high-level delegation of former officials to Taiwan. The group includes former Chairman of the Joint Chiefs of Staff Michael Mullen and former top Pentagon official Michèle Flournoy. In addition to the show of support for Taipei, the delegation will urge Taiwan to intensify long-needed efforts to bolster its own defenses.
U.S. Politics: President Biden tonight will deliver his first formal State of the Union speech to a joint sitting of Congress. Besides talking up the strong economic recovery, falling coronavirus caseloads, and trying to rally the nation behind its approach to the Russia-Ukraine conflict, Biden is expected to urge Congress to move forward with the parts of his economic program that have stalled.
U.S. Labor Market: The tight labor market has prompted mass resignations. One little-noted factor driving workers to quit their jobs is employers’ longstanding practice of giving them only limited hours in order to maintain staffing flexibility and avoid providing benefits. With the balance of power now shifting toward workers, we would not be surprised if employers will have to give their employees more hours and stability. While that could help ensure staffing levels, it would probably also raise costs and weigh on profit margins and stock prices over time, not to mention adding to inflation.
COVID-19: Official data show confirmed cases have risen to 437,243,739 worldwide, with 5,958,335 deaths. In the U.S., confirmed cases rose to 79,045,719, with 950,521 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 215,602,728, equal to 64.9% of the total population.
- In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 infection fell to 49,899 yesterday, down 44% from just two weeks ago.
- On a less positive note, the Omicron mutation continues to wreak havoc in Hong Kong. Senior advisers to Carrie Lam, the city’s chief executive, said a “limited lockdown” would be necessary when the city begins mandatory mass testing later this month in an effort to quell China’s worst-ever COVID-19 outbreak. As a result, panic buying has cleared supermarket shelves, and long queues have formed outside banks and pharmacies as residents stocked up in anticipation of the lockdown.
Economic and Financial Market Impacts
- The rapid growth of life-science research during the pandemic is triggering a record boom in the development of new lab space and offices serving these companies.
- Development of buildings geared toward biotechnology, pharmaceutical, and other laboratory firms was already on the rise before 2020, but demand for this space intensified as billions of dollars poured into research and development related to the virus.
- Life-science space has also been enjoying high occupancy rates because—unlike traditional office buildings—much of the lab work requires specialized equipment and building infrastructure that cannot be easily replicated at home.
- The trend suggests real estate investment trusts (REITs) focused on lab buildings could be a big beneficiary.