Daily Comment (March 22, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
We begin today’s Comment with an update on the Russia-Ukraine war. We next review a range of 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: The Russian and Ukrainian armed forces appear to remain in a stalemate over most of Ukraine, with both sides failing to gain much territory over the last day. Russian troops entered the key southeastern port city of Mariupol, but fighting in the streets has apparently been indecisive. In frustration over its inability to take more territory, the Russians continue to attack civilian areas with artillery, missiles, and aerial bombs. U.S. officials say this might be a new strategy of wearing down the population so it will accede to Russian control of both Crimea and southeastern Ukraine. Meanwhile, reports suggest railway workers in Belarus have been cooperating with Ukrainians to cut off railroad links between the countries and thwart Russia’s effort to resupply its troops in Ukraine. Here in the U.S., yesterday, President Biden warned the nation’s businesses and nongovernmental organizations to immediately “harden” their defenses against potential cyberattacks by the Russian government, citing “evolving intelligence” of such plans by the Kremlin. The President also warned again that Russia could use chemical weapons within Ukraine.
- As we’ve mentioned previously, Russia’s invasion has prompted European governments to embark on a quick increase in their defense budgets. However, the renewed commitment to a stronger defense is even broader than that. EU officials have now drafted a much tougher “Strategic Compass” plan to bolster the bloc’s autonomous defense capability, including a much stronger focus on the threat from Russia and a commitment to bolster its military mobilization and transport capabilities. EU leaders are expected to endorse the draft plan at their summit later this week.
- Unfortunately, the U.S. and European shipments of vast quantities of weapons to Ukraine could expose the West’s own defense industry limitations.
- For example, the U.S. has tens of thousands of Stinger anti-aircraft missiles in its inventory; it can continue to send hundreds or thousands at a time to Ukraine.
- However, the missile is no longer produced in the U.S., and restarting production at the aging U.S. missile production facilities would be difficult.
- Large shipments of the missile to Ukraine may require drastically bringing forward the Stinger’s replacement from its current date of 2030.
- Ukrainian military officials examining captured Russian vehicles and weapon systems have discovered the extensive use of Western subcomponents, particularly German parts produced in Russian factories contrary to civilian-use-only contracts. The news has sparked a controversy in Germany and prompted some German companies to stop shipments to Russia and shut down their factories there.
- Separately, support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, representing a significant shift in the continent’s stance toward how to ratchet up economic pressure on Moscow. Such a ban is still far from certain, but if enacted, it would further ratchet up demand for non-Russian energy and likely drive prices even higher, worsening inflation. Biden administration officials say Russian oil exports have already dropped by at least 2 million barrels per day because of sanctions and trading bans, depriving the government of a key source of revenue. The biggest independent oil traders are warning about major diesel shortages in Europe, including the potential for rationing.
- In other news related to Russian trade, finance, and sanctions, Moscow yesterday made a $66 million interest payment on a dollar bond due in 2029, again skirting default.
- Russia faces a further $549 million of interest payments on its foreign-currency bonds this month and a $2 billion bond repayment in early April
- Investors are unsure whether the country will be able to keep up debt payments beyond May 25, when an exemption in U.S. sanctions for interest payments expires.
- In Asia, the Hong Kong-listed shares of Russian aluminum giant Rusal (0486 HK, HKD, 4.03) plunged on Monday after Australia imposed an immediate ban on exporting bauxite and alumina to Russia to punish it for its invasion of Ukraine. The ban should worsen Russia’s supply shortages further, but it isn’t expected to halt Russian output completely.
Belgium: As Europe continues working to increase its energy security following the Russian invasion of Ukraine, Belgium’s federal government has postponed its plan to phase out nuclear electricity generation by 2025. One reactor at both the Doel and Tihange nuclear power plants will have their lives extended by ten years to 2035. The move further underscores our optimism regarding uranium and other aspects of the nuclear industry.
Japan: Electric utilities are scrambling to keep the lights on in Tokyo today, as freezing temperatures and power plant outages following a strong earthquake last week put the nation’s capital at risk of blackouts. The government has warned that households and businesses need to reduce power consumption as much as possible, although it is not yet clear how much that will weigh on overall Japanese economic activity or financial markets.
China: Heavily indebted real estate development giant Evergrande (3333 HK, HKD, 1.65) said lenders to one of its property services units had seized $2.1 billion in cash pledged as security for third-party guarantees. The move dealt a blow to international investors, hoping to recoup some of their losses through the subsidiary. It will also put further downward pressure on Evergrande’s stock and bond values.
U.S. Monetary Policy: During a moderated discussion after a speech in Washington yesterday, Federal Reserve Chair Powell warned that the central bank was prepared to raise interest rates in half-percentage-point steps and high enough to slow the economy deliberately, if needed, to bring down inflation. The remarks struck a tougher tone than he used just days earlier in a press conference after the Fed voted to raise its benchmark rate by a quarter point. In response, stock values fell yesterday, and bond yields have jumped. Treasury obligations are now suffering through their worst month since late 2016.
- We continue to believe aggressive rate hikes could quickly lead to economic or financial problems, forcing an early Fed retreat.
- All the same, such rapid or extensive rate hikes could push the economy into recession, especially given the current backdrop of high energy prices. That concern goes far toward explaining the current flattening trend in the yield curve.
U.S. Fiscal Policy: Some state governments are also taking steps to mitigate the impact of high inflation, especially for energy products. The steps include mostly short-term suspensions of state gasoline taxes, despite the loss of revenue that will mean for state coffers.
- Maryland and Georgia have already suspended their state gasoline taxes.
- Legislators in Illinois, Massachusetts, Maine, Michigan, Minnesota, New York, and Tennessee are weighing whether to do the same.
- Lawmakers in California are considering giving drivers a $400 rebate to help cushion the blow of high gasoline prices.
U.S. Regulatory Policy: The SEC has proposed strict requirements for publicly traded companies to report information on greenhouse-gas emissions and risks related to climate change, in one of the Biden administration’s potentially most significant environmental actions to date. The proposal will be open for public comment for at least two months before the agency begins work on a final rule.
COVID-19: Official data show confirmed cases have risen to 472,222,374 worldwide, with 6,094,632 deaths. In the U.S., confirmed cases rose to 79,778,973, with 972,634 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 217,093,232, equal to 65.4% of the total population.
- In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 rose to 21,679 yesterday, although that was still down 41% from two weeks earlier.
- In a sign of the continued decline of COVID-19 across the U.S., the Defense Department last Wednesday skipped its update of coronavirus case numbers—data it has faithfully published weekly since July 2021.
- Even though China, Hong Kong, and some other Asian countries continue to grapple with their vast new Omicron waves, the situation continues to improve in Japan. As of today, quasi-emergency measures have ended in all 18 prefectures they had covered, including Tokyo and Osaka, amid a decreasing trend in the number of new infections. That marks the first time since January 8 that the country has no emergency measures in place.
- A new study found that people who recovered from COVID-19 within the past year are 40% more likely to be diagnosed with diabetes compared to those who weren’t infected. The increased risk translates into 1% of people who have had COVID-19 developing diabetes who otherwise wouldn’t have, resulting in potentially millions of new cases worldwide.