Daily Comment (May 17, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Today, we open our Comment with an update on the Russia-Ukraine war, where the Russian offensives still seem to be stalled, and Ukraine continues to build its momentum. We next review a range of international and U.S. developments with the potential to affect the financial markets. Finally, we have the latest news on the coronavirus pandemic.
Russia-Ukraine: Russian forces apparently failed to make any significant territorial gains in either eastern or southeastern Ukraine yesterday. Indeed, the Ukrainian forces’ counteroffensive around Kharkiv has reportedly pushed the Russian troops there all the way to the Russia-Ukraine border. Perhaps just as important, Russian military bloggers and pundits are now openly criticizing Russia’s performance in the war. That could potentially lead to a broader social disenchantment with the war and growing political problems for President Putin. At the same time, Ukrainian leaders have been emboldened and are now forming more expansive war aims, including a stretch goal of regaining control over Crimea and the areas in eastern Ukraine that were seized by Russian forces in 2014. A particular worry is that Russia could first try to annex those territories de facto into Russia itself. Any Ukrainian counterattack could then be deemed an attack on Russia itself and potentially trigger nuclear retaliation from the Kremlin.
- Echoing our belief that the war has accelerated deglobalization and the fracturing of the world into at least two main geopolitical and economic blocs, the chief executives of Chevron (CVX, $173.01) and Woodside Petroleum (WOPEY, $21.68) said Russia would probably be permanently shut out of the global energy market once Europe weans itself off the country’s oil and gas. Seeing unflinching resolve by the Europeans, the CEOs predicted profitable new opportunities for producers in the U.S. and Australia.
- All the same, near-term European energy politics remain fraught. Most importantly, Hungary continues to resist the new EU proposal to ban imports of Russian oil and oil products.
- Illustrating how the more authoritarian leaders in the U.S.-led bloc are trying to milk the war, the Hungarian foreign minister yesterday said his country would drop its opposition to the Russian oil ban if the EU provided €15-18 billion to fund “a total modernization of Hungary’s energy structure.”
- EU foreign policy chief Borrell said it still may take weeks for the EU to agree on a Russian oil ban.
- In yet another sign that the U.S. and the Europeans are coalescing into a tightly knit bloc, senior U.S. and EU officials yesterday unveiled initiatives to better align their policies and work in ten areas, including high-tech supply chains, artificial intelligence, international industrial standards, and global food security.
- Facing the reality that his military is failing and could soon become a spent force, President Putin signaled he would tolerate Finland and Sweden joining NATO. However, he also warned that Russia would respond if the alliance installed military bases or equipment in either country. Russian Deputy Foreign Minister Sergei Ryabkov took a harder line, warning that the action by Finland and Sweden will have far-reaching consequences, and that Russia won’t “simply put up with it.”
- Despite Russia’s stumbles and Ukraine’s successful defense elsewhere in the country, Ukrainian fighters holed up in the Azovstal Steel Plant in the southeastern port city of Mariupol have finally surrendered. The move gives Russia complete control of the destroyed city.
European Central Bank: Dutch central bank chief Klaas Knot, one of the top inflation hawks on the ECB’s policy committee, warned the body may hike its benchmark interest rate by an aggressive 50 basis points in July rather than the 25 basis points suggested by ECB President Lagarde. The statement has pushed the euro up more than 1% to $1.0537 so far this morning.
France: President Macron has named Élisabeth Borne as his new prime minister. The choice of Borne, a technocrat who previously served as Macron’s labor minister, shows the pro-business president is tacking leftward before voters head to the polls in mid-June to elect members of the National Assembly.
- Borne was once chief of staff to Ségolène Royal, a Socialist Party heavyweight, who mounted a high-profile yet unsuccessful presidential campaign in 2007.
- Macron’s party is expected to win a majority of the 577 seats in the legislature in the election, but some potential supporters have been drifting toward leftist candidates.
China Equity Markets: Analysts at JPMorgan (JPM, $118.26) upgraded seven major Chinese technology companies to “overweight” recommendations after cutting them “underweight” in March. The analysts upgraded several other Chinese stocks to “neutral” from “underweight.” The upgrades are particularly notable because JPMorgan had called a swath of the Chinese tech sector “uninvestable” just two months ago.
- In that instance, draft analyst reports had called dozens of the tech firms uninvestable.
- When compliance officials asked to soften those assessments, the analysts inadvertently let several of the reports get published with the “uninvestable” language unchanged.
Global Cryptocurrency Market: New data show investors have yanked $7 billion from Tether since the world’s biggest stablecoin briefly lost its peg against the U.S. dollar last week. The data show Tether’s market value has fallen by 9% since May 12, to $76 billion, as tokens have been removed from circulation to meet redemption requests. Coupled with last week’s collapse of stablecoin TerraUSD after it “broke the buck,” the figures point to continued concerns that stablecoins may be more “runnable” than previously realized.
Global Market for Traditional Currencies: Against the backdrop of geopolitical tensions, high inflation, differing interest-rate trajectories in different countries, and volatile bond markets, an index measuring swings in currencies linked to the Group of Seven countries has jumped more than 70% this year. One measure of volatility in the euro has more than doubled since November, picking up mostly in March. The increased volatility, in part, reflects how many currencies have been losing value as the dollar strengthens.
U.S. Baby Formula Market: Responding to the mass shortage of baby formula following the shutdown of a key production plant in February for sanitation issues, officials at the FDA said they are taking steps to ease imports of foreign formula. Foreign manufacturers will first have to apply with the FDA to be able to ship their formula to the U.S., and then the agency will have to conduct a review to assure quality control and safety. The FDA and Abbott Labs (ABT, $109.71) also reached an agreement allowing the shuttered formula plant to reopen.
COVID-19: Official data show confirmed cases have risen to 522,144,155 worldwide, with 6,267,417 deaths. The countries currently reporting the highest rates of new infections include Germany, the U.S., France, and South Korea (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.) In the U.S., confirmed cases rose to 82,613,620, with 999,842 deaths. In data on the U.S. vaccination program, the number of people considered fully vaccinated now totals 220,618,615, equal to 66.4% of the total population.
- The seven-day average of people hospitalized with confirmed or suspected COVID-19 in the U.S. came in at 22,075 yesterday. The tally of people hospitalized with COVID-19 is now up 26% from two weeks earlier, although it remains relatively low.
- Yesterday, the FDA authorized the first nonprescription test that can detect COVID-19, influenza, and respiratory syncytial virus, or RSV.
- The test, by Laboratory Corporation of America (LH, $242.38), can be sold directly to consumers online or at retail. Consumers collect a nasal-swab sample themselves before sending the sample to Labcorp for analysis.
- The test kit costs $169 but comes at no upfront cost to those who meet clinical guidelines and have insurance. People without insurance would have to pay in advance when ordering a kit.
- In China, the latest wave of infections remains tiny compared with many other countries, but President Xi’s strict “zero-COVID” policies continue weighing on economic activity and even sparking some protests.
- While Shanghai’s falling infections allowed the local government to ease some lockdown restrictions yesterday, authorities in Beijing are tightening that city’s restrictions.
- Over the weekend, dozens of students at Beijing’s prestigious Peking University protested after barricades were erected without notice at an off-campus residence hall, restricting their space for movement and access to the compound’s gate.
- Posts about the incident were quickly deleted, and key search words related to the protest were blocked from Chinese social media.
- In North Korea, new “fever” cases—a proxy for COVID-19 infections—totaled 390,000 on Sunday alone, bringing the official total to over 1.2 million since the first fever cases were reported a week ago. Health experts say that without vaccines and testing capacity, the country risks being overwhelmed by a health crisis not seen since it suffered a famine that killed over a million people in the 1990s.
Economic and Financial Market Impacts
- China’s latest draconian lockdowns have led to a shortage of a dye widely used in medical scans, prompting U.S. hospitals, including the Mayo Clinic, to ration supplies, postpone procedures, or switch to less optimal imaging.
- The world’s supply of the dye comes from a single plant in Shanghai, and the authorities had shut that plant for several weeks during the spring as it locked down the city in an effort to contain the spread of COVID-19. The plant has since been reopened, but it is still only operating at 50% of its capacity.
- The reckless reliance on a single plant for the dye reflects the ethos of globalization after the Cold War. Factors like geopolitics, populism, and the pandemic have now shown that the world may not be as peaceful or stable as necessary for hyper-efficient supply chains and just-in-time inventories.