Daily Comment (November 1, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with an update on the Russia-Ukraine war, including the latest on Russia’s destruction of Ukrainian civilian infrastructure and Yevgeny Prigozhin’s continued effort to position himself for a potential takeover of power.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including foreign electoral news and a preview of the Federal Reserve’s latest policymaking meeting.

Russia-Ukraine:  Russian forces continue to launch massive air, missile, and kamikaze drone attacks across Ukraine, targeting mostly civilian energy infrastructure in an effort to break the Ukrainians’ will to fight.  Ukrainian utility crews are racing to repair the damage before that happens.  Meanwhile, Ukrainian forces continue their counteroffensives in the country’s eastern Donbas region and in the south around Kherson.  It remains unclear just how strenuously the Russians will defend Kherson as various reports indicate they are already pulling back some units to the east of the Dnipro River.

  • Following up on Russia’s declaration on Saturday that it would no longer participate in the UN-brokered deal allowing Ukraine to export grain from its southern ports, the Russian government warned yesterday that it may interdict the ships that continue to arrive at and depart from those ports. Global grain prices have surged since yesterday on fear that Ukrainian grain stocks would no longer be available on the market.
  • On a more positive note, however, European fertilizer producers are ramping up output again as natural gas prices continue to fall due to warm weather and Europe’s gas storage facilities being full. Renewed production could help bring down the cost of fertilizers and encourage farmers to use more of the product, potentially boosting yields globally and helping bring down global food costs.
  • Meanwhile, Yevgeny Prigozhin, financier and mercenary leader of the Wagner Group, continues working to build his popularity for an apparent effort to grab power if President Putin becomes sufficiently weakened. In his latest gambit, Prigozhin has lambasted the leaders of the provincial government of St. Petersburg and associated oligarchs for allegedly setting up a criminal organization to plunder the state budget.  Local media reports that Prigozhin’s popularity is “skyrocketing.”

China:  Today, reports indicate that the Chinese economy will continue to face headwinds from President Xi’s crackdown on private enterprise and his strict Zero-COVID policies.  In one such report, the government banned entertainers and social-media influencers from endorsing private tutoring, health foods, tobacco, and other goods and services that don’t conform to “socialist core values . . . and traditional virtues.”  In another report, authorities have once again shut down Shanghai Disneyland after a single guest tested positive for COVID-19.

  • Separately, a mass pandemic shutdown of the city of Zhengzhou continues to disrupt the main iPhone factory there, raising costs for Apple (AAPL, $153.34) and top assembler Hon Hai Precision Industry (HNHPF, $6.23).
  • The Communist clampdown on private enterprise and disruptive, unpredictable pandemic lockdowns continue to slow the Chinese economy, taking further wind out of Chinese stock values.

United Kingdom:  Illustrating the economic pullback taking hold in the U.K. because of soaring energy prices and skyrocketing interest rates, the Nationwide housing company said home prices fell 0.9% in October, for their first drop since July 2021 and their biggest monthly decline since June 2020.  Home prices in October were still up 7.2% year-over-year, but that was significantly cooler than the 9.5% rise in the year to September.

Denmark:  In parliamentary elections today, Prime Minister Mette Frederiksen is in danger of being ousted, in large part because of her hasty decision during the pandemic to require the slaughtering of some 17 million mink over infection concerns.  The decision has devastated the country’s once-thriving fur business.

Brazil:  More than a day after leftist firebrand Luiz Inácio Lula da Silva was declared the winner of Sunday’s presidential election, incumbent President Jair Bolsonaro still has not conceded the contest.  Truckers, who have made up a large share of Bolsonaro’s constituency, are disrupting traffic at hundreds of locations around the country to show their support for the president.  Other major supporters of Bolsonaro have recognized Lula’s win, but the incumbent’s failure to concede so far raises the risk that he will officially contest and spark a constitutional crisis.

Israel:  Today, the country is holding its fifth parliamentary election since 2019, with polls predicting a tight vote that will give neither center-left Prime Minister Lapid nor right-wing opposition leader Netanyahu a clear path to power.

Iran:  The anti-government protests sparked by the death of a woman in the custody of Iran’s morality police on September 16 have continued in recent days despite a warning to stop by Major Gen. Hossein Salami, the commander of Iran’s Islamic Revolutionary Guard Corps.  The direct warnings from Gen. Salami appeared to be part of a new strategy to target students more directly.

U.S. Monetary Policy:  Officials at the Federal Reserve begin their latest policymaking meeting today, with their decision due on Wednesday afternoon.  The officials are widely expected to hike their benchmark fed funds interest rate by another 75 basis points, but investors are also hoping that they will signal more moderate rate hikes going forward out of fear that tighter monetary policy could send the U.S. economy into a sharp downturn.  Meanwhile, derivative markets suggest that investors are now betting that the Fed policymakers will have to keep interest rates higher for longer before they finally bring inflation pressures down to acceptable levels.

U.S. Tax Policy:  President Biden yesterday called for a windfall profits tax on energy producers that benefit from today’s high energy prices but don’t reinvest their profits in order to help bring down prices.  Of course, the proposal would face major hurdles in Congress, especially if the Republicans win the House and/or Senate in next week’s midterm election.  All the same, the proposal highlights the tax and regulatory risk that energy companies face as they rake in profits because of high prices.

U.S. Antitrust Policy:  Yesterday, a federal judge ruled in favor of a Justice Department move to block the planned merger of book publishers Penguin Random House and Simon & Schuster, on grounds that the combination would lessen competition in the market for publishing rights.  The decision highlights the more aggressive antitrust stance taken by the Biden administration.

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