Daily Comment (March 15, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Our Comment opens with an update on the Russia-Ukraine War, where there has been little discernible change in the military situation on the ground or in diplomatic efforts to end the conflict. We next review some international and U.S. developments with the potential to affect the financial markets today. We wrap up with the latest news on the coronavirus pandemic.
Russia-Ukraine: There was little change in the military situation in Ukraine yesterday. Russian forces continue trying to encircle key cities such as the capital Kyiv, but Ukrainian forces continue to thwart them. In response, the Russian military continues to attack civilian targets with missiles, long-range artillery, and aerial bombing. In one of the more concerning military developments, Ukraine’s military said it had detected a Russian surveillance drone crossing the border into neighboring Poland, a NATO member, but it shot the drone down after it crossed back into Ukraine’s airspace. Meanwhile, Russian and Ukrainian officials held a video conference to discuss a ceasefire, but it adjourned until today with no discernible progress. Israeli Prime Minister Bennett spoke separately with Russian President Putin and Ukrainian President Zelensky in an effort to find a compromise, but those talks also produced no results. Finally, the prime ministers of the Czech Republic, Poland, and Slovenia will travel to Kyiv today in a show of support for Ukraine.
- Meanwhile, U.S. National Security Advisor Sullivan and China’s top foreign affairs official, Yang Jiechi, met in Rome yesterday to discuss the situation. No details on the meeting were released other than a U.S. official’s comment, “We do have deep concerns about China’s alignment with Russia at this time, and the national security adviser was direct about those concerns and the potential implications and consequences of certain actions.”
- Without a doubt, Sullivan would have warned Yang that if China gave more support to Russia, especially the military assistance it has signaled it is open to, the U.S. and its European allies would impose economic punishments that would further impede trade and investment with the Chinese.
- In other words, the meeting illustrates our prediction that the Russia-Ukraine war will further cleave the world into two or more economic blocs linked by only limited trade and investment ties.
- As a sign of China’s frustration with the situation, Foreign Minister Wang Yi today complained in a meeting with his Spanish counterpart that China is not a party to the war and should be spared any impact from the West’s sanctions against Russia. He also warned that “China has a right to safeguard its legitimate rights and interests.”
- In another negative sign, Beijing has blocked access to a U.S. website where a high-level Chinese researcher published an article urging Chinese leaders to disassociate from Russia and make amends with the West. We had taken that article as a potential sign that China was getting cold feet over its support for Russia. We still think the Chinese leadership is struggling to decide on their best course, but for now, the balance of power may be with those leaders who want to continue supporting Russia.
- Coupled with China’s new coronavirus outbreak and signs that Beijing is continuing its regulatory crackdown, the prospect that China will be collateral damage in the war has fed into a further sharp drop of almost 5% in Chinese stocks so far today.
- Even as the Chinese economy looks increasingly at risk because of the war, European countries continue to tighten the screws on Russia. European Union member states have formally approved a fourth package of sanctions against Russia.
- The new sanctions include freezing the assets of several oligarchs, imposing an import ban on Russian steel and iron, imposing an export ban on luxury goods worth more than €300 and cars costing more than €50,000, and outlawing investments in Russian energy companies.
- Russia is due to make two interest payments on its dollar bonds on Wednesday, but because of the Western sanctions to date, it is unclear whether investors will actually receive their cash. Russian debt continues to trade at distressed prices as investors consider the potential for a uniquely messy government debt default.
- Congressional leaders announced that President Zelensky will make a video address to a joint session of the Senate and House of Representatives on Wednesday. In the address, to be subsequently released to the public, Zelensky is expected to press for more military assistance to help push the Russians out of his country.
Global Nickel Market: The London Metal Exchange said the buying and selling of nickel would resume on Wednesday after it suspended the market for six trading sessions following an unprecedented price surge in part related to the Russia-Ukraine war. The exchange also unveiled rules meant to rein in nickel-price moves and protect its members, after a Chinese metals giant racked up billions of dollars in losses from wrong-way bets.
Germany: As we have already noted, one major result of the Russia-Ukraine war is that many European countries have signaled they will finally boost their military budgets after years of underinvestment in defense. Germany has shown the most dramatic about-face with a landmark decision to inject €100 billion into the country’s armed forces.
- In the first major defense deal under the new armaments program, Defense Minister Lambrecht said yesterday that Germany would purchase U.S.-made F-35 fighter jets capable of carrying nuclear weapons. It will also upgrade its Eurofighter Typhoon jets for electronic warfare.
- With defense officials in Berlin scrambling to identify spending opportunities that promise fast results, the government is reportedly considering the suspension of onerous contracting rules. The prospect is pushing German defense firms to jockey for position in what they see as an impending feeding frenzy.
- In late March, we will issue a new Bi-Weekly Geopolitical Report outlining the prospects and investment implications of higher defense spending in the NATO countries.
Turkey: The ruling alliance has unveiled a plan to amend the country’s electoral laws in a way that could damage the opposition’s efforts to wrest control of parliament from President Erdogan’s party. If Erdogan is able to further entrench his political position, prospects for economic orthodoxy and healthier economic performance would dim.
Saudi Arabia: Hon Hai Precision Industry (HNHPF, $6.89), the top manufacturer of iPhones, otherwise known as Foxconn, said it is in talks with Saudi Arabia about jointly building a $9 billion multipurpose facility that could make microchips, electric-vehicle components, and other electronics like displays. The facility would be located in Neom, a tech-focused city-state that the kingdom is developing in the desert.
- Besides Saudi Arabia, the company is also talking with the United Arab Emirates about potentially siting the project there.
- At one level, the talks underscore Foxconn’s efforts to diversify its manufacturing and locate more activity outside Taiwan and China. Just as important, the talks illustrate the extent to which Saudi Arabia and the UAE are attempting to diversify their economies away from petroleum and develop their own cutting-edge manufacturing capabilities. The UAE is already an up-and-coming center for high-tech military goods. If successful, these efforts could potentially transform the Middle Eastern economy and make its financial markets more attractive for foreign investors.
U.S. Monetary Policy: Monetary policymakers at the Federal Reserve will begin their latest two-day meeting today. Last month, Chair Powell signaled the officials would use the meeting to hike the benchmark fed funds interest rate by 0.25%. However, the hike is expected to be just the first in a series of interest-rate increases. Powell has hinted that a series of shocks, including the Russian invasion, could keep inflation uncomfortably high and potentially call for larger rate rises this summer. We continue to believe financial fragilities and/or an economic slowdown will probably limit how far the Fed will actually increase rates.
- Separately, Democratic Senator Joe Manchin of West Virginia said he wouldn’t support President Biden’s nomination of Sarah Bloom Raskin to serve as the Feb’s vice chair for regulation, citing her past calls for regulations that would limit funding to companies that produce fossil fuels.
- Since the Senate is split evenly between Democrats and Republicans, and since no Republican seems likely to support Bloom Raskin, the decision by Manchin will probably doom her nomination and force President Biden to come up with a replacement.
COVID-19: Official data show confirmed cases have risen to 459,927,299 worldwide, with 6,046,747 deaths. In the U.S., confirmed cases rose to 79,562,369, with 965,106 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 216,690,804, equal to 65.3% of the total population.
In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 fell to 27,901 yesterday, down 43% from two weeks earlier.
- Even though new cases, hospitalizations, and deaths are falling in the U.S., several European countries are suffering from a new wave. Many factors are likely at play, including relaxed mitigation measures, the spread of the B.A.2 variant, and waning vaccine protection.
- The new wave in Europe raises the possibility that the U.S. could also see a renewed uptick.
- However, because of factors ranging from new treatment options to social pushback against restrictions, we suspect any new wave would have a much less economic and financial impact than previous waves.
- Meanwhile, China and Hong Kong continue to face skyrocketing infections in their latest wave, with the government imposing strict social distancing rules and locking down an increasing portion of the economy.
- Investors are increasingly concerned that the new lockdowns will slow the Chinese economy, producing significant headwinds for global economic activity.
- Reflecting that, oil prices today have again slid below $100 per barrel, despite the ongoing Russia-Ukraine war and massive sanctions on the oil-dependent Russian economy.