Daily Comment (March 9, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with an update on the Russia-Ukraine war, with a particular focus on yesterday’s announcements that the U.S., the U.K., and the EU would ban or work to cut imports of Russian energy commodities.  It also appears that the Russian government may be preparing to implement its own embargo on commodity exports.  We next turn to a range of international and U.S. news that could affect the financial markets today.  We wrap up with the latest developments regarding the coronavirus pandemic.

Russia-Ukraine:  Russian forces continue attacking both military and civilian targets throughout Ukraine, although they are still struggling to seize much territory as they face a motivated, disciplined, and adaptable Ukrainian army that is already employing some insurgency tactics.  Thousands of Ukrainian civilians trying to escape are still coming under attack despite Russian promises to ensure their safe passage.  Meanwhile, Ukrainian President Zelensky effectively continues to lead the country, even posting a video yesterday shot in his normal office to demonstrate his fearlessness and suggests that Russia is too timid to target him.  Among the most important developments over the last day:

  • As anticipated, President Biden announced that the U.S. would ban imports of Russian crude oil, natural gas, and coal in order to further punish Russia for launching the war and pressure it to reverse course. The European Union said it planned to cut its imports of Russian natural gas by two-thirds by the end of this year, and the U.K. said it would phase out the importation of Russian oil by the end of the year.  On top of that, private companies in the U.S. and Europe continue to pull back from their operations in Russia on fears of tarnishing their reputations.  On a more positive note, some investors have started to bet that the major central banks and key governments will introduce economic stimulus measures, such as delaying interest-rate hikes, to help offset the impact of the war and its associated commodity supply disruptions.  Optimism about such measures appears to be a driving factor for the jump in prices for risk assets so far today.
    • Russian crude makes up well under 10% of U.S. oil imports, so the practical effect of the U.S. oil import ban may be less than meets the eye. On the other hand, certain U.S. refiners are more dependent on Russian supplies and could feel more of an impact.
    • All the same, after imploring foreign oil producers such as Saudi Arabia and Venezuela to increase their oil exports and help bring down prices, the Biden administration yesterday finally turned to domestic oil producers for help. The State Department’s special envoy and coordinator for international energy affairs said U.S. shale producers should be doing “whatever it takes” to increase output, claiming new drilling is not being held back by White House policies but by investor demands for financial discipline and dividends.
      • While U.S. oil producers are benefitting from today’s high prices, we suspect that any broad expansion of investment and output will require greater assurances than this one statement from a State Department official.
      • To date, President Biden has been reluctant to abandon the “green” policies supported by his party’s progressive wing. Oil producers probably need to see that Biden is willing to jettison that wing politically before they could trust that U.S. policy is indeed becoming friendlier to energy producers again.
    • The main threat to the global economy from the import bans is that they could probably escalate the economic dimensions of the war. Indeed, Russian President Putin overnight issued a decree calling for a ban on certain Russian commodity exports through the end of the year.  The decree gives the government two days to come up with a list of affected exports.  Given Russia’s huge role in supplying many key commodities, an aggressive list could threaten major supply disruptions, even higher prices, slower global economic growth, and renewed volatility in the financial markets, despite the rebound in risk asset pricing so far today.
    • Separately, the Polish government floated a proposal to transfer its old Russian-made MiG-29 fighter jets to the U.S., which would, in turn, give them to the Ukrainian government and replenish Poland’s fighter fleet with used U.S. F-16s. Clearly, the proposal aimed to insulate Poland from Russian accusations of participating in the war against it, but at the end of the day, the U.S. Defense Department rejected the idea as untenable.
    • Perhaps most interesting, several U.S. intelligence officials testified before Congress about where President Putin and the Russian military would go from here. Led by Director of National Intelligence Avril Haines and CIA Director William Burns, the officials made several important assessments.
      • The Russian military is suffering from many shortcomings, ranging from poor morale to insufficient planning and weak logistics. It probably couldn’t control the entire country of Ukraine or install a stable puppet government there with the forces now committed to the war.
      • Compounding the Russian military’s problems, the Ukrainian resistance has proved unexpectedly strong and effective. Even if the Russians win the first phase of the conflict, they will likely face a persistent, highly effective insurgency.
      • Ominously, the officials assessed that President Putin sees the conflict as one he simply cannot afford to lose, so the obstacles he’s facing will prompt him to double down and intensify his attacks on Ukrainian civilians. In the words of CIA Director Burns, “It will be an ugly next few weeks.”

United States-Saudi Arabia-United Arab Emirates:  New reports indicate the leaders of Saudi Arabia and the UAE refused to take telephone calls from President Biden as he sought to boost global oil production in the runup to the Russia-Ukraine war.

  • The refusals reportedly stemmed from Saudi and UAE anger at the administration’s Middle East policy, especially its reduced support for their war in Yemen and efforts to counter Iranian aggression in the region.
  • The snub by the Saudis and the UAE reflects the downside of the U.S. effort to extricate itself from Middle East geopolitical and security issues.  Regarding the war between Russia and Ukraine, it also suggests some of the world’s most important oil producers will offer little cooperation as the administration struggles to bring down energy prices.  In a word, the snub is yet another bullish factor for global oil prices.

South Korea:  Elections for a new president were held today, although the latest reports suggest the voting is very tight, and it’s not clear who the winner is.  The voting has been dubbed the “unlikeable election” following months of mudslinging and scandal between Lee Jae-myung of the ruling center-left Democratic Party and Yoon Suk-yeol of the center-right People Power Party.

U.S. Fiscal Policy:  Congressional leaders today released a sweeping bill to fund the federal government for the rest of the 2022 fiscal year, setting the stage to avoid a partial government shutdown when the current stopgap spending authorization expires on Saturday.

  • Besides appropriating money for the federal government’s general domestic and international activities, the $1.5 trillion bill would ramp up U.S. defense spending and provide about $13.6 billion for humanitarian, economic, and military aid to Ukraine.
  • The House is expected to vote on the omnibus legislation Wednesday and send it to the Senate, which will then debate it and vote on it this week. Since the bill results from weeks of negotiation among Congressional leaders of both parties, it should be passed quickly and signed into law by President Biden before the Saturday deadline.

U.S. Postal Service:  Yesterday, the Senate gave final approval to legislation designed to put the U.S. Postal Service on stronger financial footing and avoid a government bailout. A key provision in the bill would undo a requirement in a 2006 law that the Postal Service prefund its retiree health benefits, which the agency projects will save $27 billion over a decade.  The bill would also require postal workers to enroll in Medicare when they reach 65 years old. That change would save the Postal Service about $22.6 billion over a 10-year period.

  • The Postal Service has been reporting losses for years, stemming in large part from a drop in first-class mail and the requirement to prefund its retiree health benefits.
  • The measure will next go to President Biden’s desk for his signature.

U.S. Labor Market:  Reflecting workers’ increased power in today’s tight labor market, as well as the challenges to the education system from the coronavirus pandemic, more than 4,000 teachers in Minneapolis have gone on strike today.  The teachers are pressing school administrators over wages, hiring, class sizes, and more resources for mental health support.

COVID-19:  Official data show confirmed cases have risen to  449,906,525 worldwide, with 6,016,023 deaths.  In the U.S., confirmed cases rose to 79,369,459, with 961,935 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 considered fully vaccinated now totals 216,273,632, equal to 65.1% of the total population.

 In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 35,496 yesterday, down 43% from two weeks earlier.

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