by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report will focus on internal fears that Russia will use chemical or nuclear weapons in Ukraine. Next is our U.S. economic and policy update, followed by international news. We conclude with our pandemic coverage.

Following his meeting with NATO and G-7 leaders, President Biden warned the West is prepared to respond “in-kind” if Russia uses chemical or nuclear weapons against Ukraine. Officials in the Biden administration are growing concerned that the longer the war drags on, the more likely Putin will respond by using more dangerous weapons. In addition to the warning, Gen. Tod D. Wolters, NATO’s top commander, activated NATO’s chemical, biological, radiological, and nuclear defense elements. The activation also means that NATO is preparing for the possibility of deploying forces. The President’s warning and NATO’s response suggest the U.S. may be utilizing inside information; given its track record regarding the telegraphing of the invasion, it is difficult to argue that the risk of an attack isn’t at least elevated. As we mentioned yesterday, the cost of such an attack may deter Russia from following through.

There is growing speculation that China is starting to distance itself from the Russian invasion. In a joint statement, nearly three weeks before the invasion, Moscow and Beijing stated the two sides had a friendship with no boundaries and emphasized that there were no “forbidden areas” in their collaboration. Fast-forward to a month after the invasion, and their close relationship appears to be fraying slightly. On Thursday, China’s envoy to the U.S. stated Beijing is committed to abiding by international laws and norms and emphasized there were limits to the two’s relationship. The remark comes after the West accused China of indirectly supporting Russia’s invasion into Ukraine, spreading propaganda on Moscow’s behalf, and possibly providing Russia with assistance during its war efforts.

China’s slight reversal of its commitment to support Russia suggests it is not willing to assist Putin at all costs. It is often forgotten that China wants to be considered an international broker of peace. Thus, the country does not want to give the appearance that it aided in carrying out war crimes. As a result, the recent comment may be a signal that China could consider pulling support from Russia if such an attack occurs. From our perspective, China may not be willing to deliver equipment such as an anti-defense system or jets. However, we believe that sending non-lethal items such as semiconductors may still be on the table.

We view elevated concerns regarding using nuclear weapons as bearish for risky assets and bullish for safe-haven assets and commodities. Although we are optimistic that such weapons will not be used in this conflict, we acknowledge wars are often unpredictable, and bad things can happen. In all, we continue to stress that Russia has more to lose than to gain if it decides to use nuclear or chemical weapons.

• While demand for Russian oil has dried in the West, China and India appear to have used this opportunity to purchase barrels on the cheap. The two countries purchased at least 13 million barrels of Ural since late February.

U.S. Economic News and Releases

 Chicago Fed President Charles Evans indicated he is open to a 50 bp rate hike but is comfortable with raising rates in 25 bp increments. Evans expressed concerns that a big increase could create messaging problems in the future. That being said, he is not a voting member of the FOMC this year.

• Nickel prices continue to surge on the LME, sparking more turmoil in commodity markets.
• The spread between the 10-year and 2-year Treasuries is approaching zero. A negative spread, also known as yield curve inversion, has been associated with recessions. However, there is a growing concern that if the curve does invert, this time could be different.

International News

• The European Union has agreed to new rules to curb anti-competitive behavior from tech firms. Under the Digital Markets Act (DMA), companies such as Google (GOOG, $2,826.24) and Apple (AAPL, $174.07) will be forced to open their platform to other businesses. The law will only impact companies whose value exceeds more than €75 billion, have annual sales of €7.5 billion, and have at least 45 million users monthly. This law is another example of the scrutiny big tech companies face as advanced economies look to rein them in. The U.S. is also considering laws to limit big tech market dominance.
• Mexican President Andres Manuel Lopez Obrador (AMLO) announced that Banxico, Mexico’s central bank, will raise rates by 50 bps to 6.5% hours before making the official statement. AMLO’s comments have led to concerns about Banxico’s independence, and his action could potentially lead to questions about the bank’s credibility.
• German Chancellor Olaf Scholz and Italian Prime Minister Mario Draghi rejected Putin’s plan to demand payment for gas in rubles.  EU leaders are still looking to wean themselves off of Russian gas as they seek to drain Russia of revenue that could be used to support war efforts. On Thursday, the U.S. and U.K. agreed to try to boost LNG supply by at least 15 billion cubic meters by year-end to replace the 14-18 billion cubic meters supplied by Russia. Some of this may come from diverting a portion of the exports given to China, which now has access to cheaper Russian gas. However, there are still production constraints that will prevent the U.S. from increasing its export capacity.

COVID-19: The number of reported cases is 476,805,836, with 6,108,631 fatalities.  In the U.S., there are 79,886,529 confirmed cases with 975,702 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 699,987,725 doses of the vaccine have been distributed, with 559,242,230 doses injected.  The number receiving at least one dose is 255,103,626, while the number of second doses is 217,271,157, and the number of the third dose, granting the highest level of immunity, is 96,999,241. The FT has a page on global vaccine distribution.

• The COVID-19 restrictions related to the recent surge of Omicron cases in Hong Kong have led foreign firms to move their operations and staff out of the city. Fifty percent of the European companies have decided to leave the city. Although some restrictions were lifted, it wasn’t enough to sway the decision of exiting firms.

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