Daily Comment (March 18, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report begins with the latest updates on the Russian invasion of Ukraine. We then give a brief roundup of international news items and conclude with COVID-19 coverage.

The conflict in Ukraine shows no signs of abating. On Thursday, Reuters news agency reported that there has been very little progress made in peace talks. The two sides are working on an agreement that would allow Ukraine to remain neutral while keeping its military. However, there are rumors that Russia is also pushing Ukraine to formally cede territory in eastern Ukraine. Zelensky has stated that he is willing to accept Russia’s neutrality demand but is unwilling to give up any parts of the country.  The two sides are still far apart, and fighting will likely continue. That being said, there are growing concerns that Putin is considering using nuclear weapons to end the war, an action that may come with its own risk. Eight years ago, Chinese President Xi Jinping signed a pledge to protect Ukraine in the event of a nuclear attack. Consequently, Russia risks a response from China if it does use its nuclear weapons in Ukraine. Although we think a military response from China is highly doubtful, we suspect Beijing will be forced to take some kind of action to maintain its credibility and willingness to honor its commitment to other countries. A non-military response from China could come in the form of a reduction in sanction relief. As a result, we suspect China may offer military support to Russia to dissuade Putin from using nuclear weapons.

Reports yesterday showed that the Biden administration is becoming confident that China will grant Russia military support in its efforts to invade Ukraine. Publicly, China has advocated that it would like to see a peaceful solution to the Ukraine crisis and has maintained that it is not taking sides in the dispute. This position is becoming less tenable by the day as Russian atrocities continue to mount. If China provides Russia with support, the U.S. will likely respond with sanctions. Given that China holds much of its reserves in dollars, sanctions could be very detrimental to its economy. That does not mean China will be deterred from helping Russia. A primary concern for China is that the collapse of Russia will make it easier for the West to form a blockade around it. The development of the AUKUS alliance formed in September of last year further adds to Chinese fears of a blockade. China may want to protect Russia simply to keep the West off its back. From a market standpoint, the situation represents another fat tail event that can potentially be detrimental to equities but may be favorable to U.S. treasuries.

Other Ukraine news

Non-Ukraine related news

COVID-19: The number of reported cases is 463,964,928, with 6,059,216 fatalities.  In the U.S., there are 79,631,708 confirmed cases with 968,329 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 696,801,055 doses of the vaccine have been distributed, with 557,644,629 doses injected. The number receiving at least one dose is 254,750,626, while the number of second doses is 216,829,829, and the number of the third dose, granting the highest level of immunity, is 96,232,774. The FT has a page on global vaccine distribution.

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