Daily Comment (October 26, 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 Moscow’s misinformation campaign claiming that the Ukrainians are planning to detonate a radioactive “dirty bomb.”  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including the latest on the U.K.’s transition to a new prime minister.

Russia-Ukraine:  Ukrainian forces continue to recapture modest amounts of territory in the country’s northeastern Donbas region and in the southern region around Kherson, while the Russians continue launching missile, air, and kamikaze drone strikes against civilian energy infrastructure throughout the country.  The continued Russian attacks prompted the Ukrainian government to request additional air-defense weapons systems in calls with U.S., U.K., and France.  Meanwhile, the Russian government continues its misinformation campaign claiming that Ukraine plans to detonate a “dirty bomb” consisting of conventional explosives laced with radioactive materials.  This time, the accusation was made in a letter to the UN Security Council.  Western officials remain concerned that the misinformation campaign is aimed at justifying a further Russian escalation of the war.

  • Separately, the Joint Coordination Center managing the Russia-Ukraine deal allowing Kyiv to ship grain out of its southern ports is investigating reports of a possible sea mine in the authorized Black Sea shipping corridor.
    • Russia has recently expressed its dissatisfaction with the way the deal is being implemented, which raises the prospect that it is trying to sabotage the deal.
    • If Russia does scuttle the deal and Ukrainian grain is once again bottled up, one likely result would be renewed upward pressure on global grain prices.
  • As we have reported previously, financier and mercenary leader Yevgeny Prigozhin continues to build a power base that could potentially allow him to challenge President Putin in the future.
    • In addition to criticizing and demeaning the Russian Ministry of Defense, Prigozhin is also building a large following on his various social media platforms.
    • That following is beginning to challenge the Kremlin’s previous near monopolization of information in the country.

EU Energy Crisis:  Reflecting our concern that high energy prices will help prompt a process of deindustrialization in Europe, German chemicals giant BASF (BASFY, $11.43) has warned that it will have to downsize permanently in the region because of unstable natural gas supplies and soaring prices.

  • The statement came less than a month after BASF opened a new €10 billion plastics engineering facility in China, but we don’t think Asia will necessarily be the prime beneficiary of Europe’s deindustrialization.
  • Rather, we think much of the investment pulled out of Europe in the coming years will be channeled toward the energy-rich U.S., boosting the U.S. economy and prompting positive spillover effects into a range of U.S. companies.

Germany-China:  Chancellor Scholz has approved a Chinese company’s acquisition of a large stake in Germany’s largest seaport, drawing criticism from the country’s lawmakers and officials in Brussels.

  • Scholz’s approval for the acquisition came despite opposition over national security concerns from his own foreign affairs, defense, economy, and interior ministries.
  • Scholz’s decision is being seen in the same light as Germany’s prior decision to build the Nord Stream natural gas pipelines that made Germany overly dependent on Russian energy. The port decision has increased concern that Scholz and his Social Democratic Party are failing to appreciate the national security implications of increased dependency on autocratic states like China and Russia.

Norway-Russia:  Norwegian authorities have arrested a Brazilian university researcher at the Arctic University of Norway in Tromsø on suspicion that he is, in fact, a Russian spy.  The researcher had been working in a group studying irregular warfare methods such as cyberattacks and disinformation campaigns.

United Kingdom:  Yesterday, newly-named Prime Minister Sunak began building his cabinet, keeping a striking number of officials in their previous positions and working hard to build unity by offering positions to all the major Conservative Party factions.

  • Importantly, Chancellor of the Exchequer Hunt will remain in his job, lending some continuity to fiscal policy in the face of concerns over Britain’s debt levels.
  • In one of his first acts under Prime Minister Sunak, Hunt announced he will delay the date for his long-awaited medium-term fiscal plan from October 31 to November 17, ostensibly to fine-tune the economic forecasts and projections.
  • The plan will now take the form of a full Autumn Statement, accompanied by forecasts from the Office for Budget Responsibility.
  • The fiscal plan will aim to close the U.K.’s fiscal hole, estimated at between £30 billion and £40 billion, with a series of tax raises and spending cuts.

U.S. Energy Market:  Spot prices for natural gas in west Texas fell below zero yesterday, as surging production in the Permian Basin region butts up against pipeline constraints and outages at liquefied natural gas terminals used to export the U.S. gas overseas.  However, the situation is expected to rectify itself in the coming days after the end of a scheduled maintenance outage on a key pipeline.

U.S. Financial Regulation:  The SEC has proposed a crackdown on the misleading marketing of investment funds by tightening the rules on fund names.  Under the proposal, funds would have to be able to prove that at least 80% of their holdings match their names. The proposal would apply to everything from “core” and “growth” funds to those that invest in “sin stocks” or claim to rely on environmental, social, and governance investing factors.

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