by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report begins with a discussion on yesterday’s FOMC meeting and an update on the situation in Ukraine. Next, we review a few international news stories. We conclude with economic and policy news and our COVID-19 coverage.

Market Update: A day after the Federal Reserve signaled that it was less hawkish than most investors anticipated, the market reversed the gain from the previous trading day. The Dow Jones and NASDAQ had their worst one-day performance since 2020. Primarily driven by a sell-off in tech, the slide in equities was due to investor concerns that inflation would remain elevated for the foreseeable future. These fears drove up yields as bondholders began selling off treasuries. Although the jobs report provided some relief briefly this morning, those gains reversed as investors remain skeptical the Fed will be able to bring down inflation. Former Federal Reserve Vice Chair Richard Clarida stated the central bank may need to raise rates into restrictive territory to contain inflation. As doubts over reducing inflation persist, we still believe commodities could benefit.

Russia-Ukraine Update: Ukraine is showing some resilience after repelling Russian troops trying to retake positions it lost in Kharkiv city and Izyum. Officials from Ukraine maintain it views the complete removal of the Russian forces out of the country as a victory. The comment suggests that Ukraine feels more confident it can withstand the onslaught from Russia and is prepared for a long war. However, it appears Russian forces are getting closer to taking over the remaining steel plant in Mariupol.

• Former National Security Council official Fiona Hill stated Putin might take one-sided action to force the West to succumb to Russian demands. Her unease comes amid concerns the Russian president could use tactical nuclear weapons in Ukraine to secure a win before giving his speech on Russia’s victory day on May 9.
• The U.S. has offered Sweden and Finland reassurance that it would support them against Russia if they apply to join NATO. The two countries sought to join the military alliance after Russia invaded Ukraine. There is growing speculation that Russia will view the Nordic countries’ membership as a threat and could take military action. As a result, the possibility that Russia could expand its war outside of Ukraine remains elevated.
• In response to pleas from Hungary to slow the pace of the phase-out of Russian oil, the EU is considering giving the country more money to adapt to the embargo. The ban on oil purchases is still pending, but members may have a deal in place by the weekend. The EU is expected to focus on banning Russian gas after the oil ban is finalized.

International News

• During a pre-election defense policy debate in Australia, Defense Minister Peter Dutton accused China of trying to influence the federal election on May 21. He stated there is evidence of Beijing supporting the opposition center-left Labor Party. The accusation highlights the growing hostilities between the two sides.
• Leaders in China have been warned not to criticize President Xi Jinping’s zero-Covid strategy. Lockdowns and other pandemic-related restrictions have been a source of discontent within China because the country appears to be where it started during the pandemic. As China heads into its 20th National Congress later this year, the Communist Party will look to show that its handling of the COVID-19 was superior to the West.
• The European Central Bank is poised to raise rates in July after dovish members have indicated that they are willing to end negative interest rates. The hike will come after the bank completes its bond purchasing program. The hawkish shift comes after euro area inflation rose 7.5% from the prior year.
• Beijing has ordered central government agencies to replace foreign-made PCs with Chinese-made computers. The push for domestically made computers suggests China is looking to promote its industries but could also signal that the country is preparing for isolation. The decision will likely harm U.S. computer companies such as HP (HPQ, $37.91).

 Economic and Policy News

• The Biden administration has outlined a plan for the government to refill the emergency crude stockpile later this year. The administration wants to encourage oil companies to invest more in production. The government’s need to refill its stock of oil sold off is intended to boost investor confidence that oil demand will remain high. Hence, the sell-off of the strategic reserve is not a long-term solution to keep prices down.
  • Despite the administration’s plan, oil producers still struggle to expand production. Drilling for shale oil has become more expensive due to rising input costs. As a result, firms find it challenging to keep cost pressures down. The rising cost may make investors wary of investing more in expanding production, as the industry has prioritized profitably.
• The Federal Reserve and the Biden administration are preparing to change decades-old rules regarding lending to low-income The change will look to encourage banking in under-represented communities. These proposed changes could harm financial equities; it could mean that banks could face additional scrutiny.

COVID-19:  The number of reported cases is 516,137,649 with 6,247,392 fatalities. In the U.S., there are 81,692,541 confirmed cases with 996,946 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 730,391,415 doses of the vaccine have been distributed, with 577,843,905 doses injected. The number receiving at least one dose is 257,960,561, the number of second doses is 219,974,190, and the number of the third dose, granting the highest level of immunity, is 101,011,852. The FT has a page on global vaccine distribution.

• The FDA announced it is limiting the emergency authorization of the Johnson & Johnson (JUN, $176.76) COVID-19 vaccine to people 18 and older for whom other vaccines aren’t appropriate or accessible and to those who opt for J&J because they wouldn’t otherwise get vaccinated. The move is due to the risk that the vaccine can cause blood clotting in rare cases.
• European companies are becoming more reluctant to invest in China following its strict lockdown policy. The EUCC for European businesses in China has become sour on the country due to the onerous restrictions.
• A new subvariant of the coronavirus spreading throughout the U.S. It is the subvariant of the 2 but can spread much faster.
• Positive news: Shanghai claims that there were no new COVID-19 cases spread in seven of its 16 districts, although people remain in lockdown. Meanwhile, Japan is expected to allow foreign tourists as it eases restrictions. The reduction in COVID-19 cases in Asia is a good sign for the global economy, although not necessarily beneficial for supply chains. Ports are worried about an increase in congestion after lockdown restrictions are lifted in China.

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