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Europe and Tech Lift Risk Appetites

Europe and Tech Lift Risk Appetites



Overview: The continued domination of the tech sector and Europe's tentative agreement is lifting equities and risk assets more generally today.  Australia and Hong Kong's 2.3%-2.5% rally led Asia Pacific markets.  The Dow Jones Stoxx 600 is higher for a third session and above its 200-day moving average for the first time since February.  The Dax is turning positive on the year.  The S&P 500 did so yesterday, though nearly 2/3 (320 companies) remain lower on the year. The S&P 500 is set to gap higher and is likely to move into the old gap (February) between roughly 3260 and 3328.5.  The European peripheral yields are falling by a couple of basis points, and Italy's two-year yield is below zero for the first time in five months.  Core yields are little changed, as is the US 10-year benchmark (~61 bp).  The dollar is mostly lower, led by the Australian and Canadian dollar and the Scandis.  The euro, yen, and Swiss franc are hovering around little changed levels.  Most emerging market currencies are stronger, led by the liquid and accessible currencies, like Russia, South Africa, and Mexico.  The Chinese yuan, alongside the Singapore dollar, slipped lower.  Gold has made a new multiyear high near $1825, and crude oil is firm, with the September WTI contract near recent highs around $41.50.  A gap we have targeted extends toward $42.50.  

Asia Pacific

Japan's June CPI readings were largely in line with expectations.  Headline inflation was steady, rising by 0.1% over the past year.  However, the core rate, which excludes fresh food, ticked up to zero from minus 0.2%.  This is a touch stronger than expected. It is the first time in three months, the core rate is not below zero.  When fresh food and energy are excluded, June prices rose by 0.4%, the same as in May.  Phone services and durable goods prices rose.  It is not a gamechanger. Last week, the BOJ forecast inflation would fall by an average of 0.5% this fiscal year.  Energy prices stabilized.  Gasoline, for example, fell 12.2% year-over-year after falling nearly 16.5% in May.  

South Korea's trade figures for the first 20-days June were weaker than expected, and are seen as a cautionary bellwether for the region.  Exports fell by 12.8% year-over-year, after falling 10.9% in May.  It was partly distorted by the number of business days, and when adjusted accordingly, exports fell 7.1%.  Imports fell 13.7% after falling 11.2% in May.  Semiconductor chip exports were off 1.7%.  In June, they were flat.  The exports of computer peripherals rose by almost 57%. On the other hand, the import of semiconductor fabrication equipment rose more than 131% from a year ago after a 140% rise in June and a 168% increase in May as new investment takes place.   Of note, shipments to China fell by 0.8% year-over-year after increasing 9.5% in June.  Exports to the US, Europe, and Japan are still falling on a year-over-year basis, but the pace has slowed. 

The dollar is in a quarter of a yen range in the first half of today's 24-hour session below JPY107.40. It is the fourth session that the greenback is recording higher lower.  There are options for $1.1 bln that expire today between JPY107.30 and JPY107.35.  There is another set at JPY107.55 for nearly $450 mln.  The Australian dollar is moving higher for the third consecutive session and is trying to solidify a foothold above $0.7000.  The next immediate target is the post-crash high set last month, a little below $0.7065.  The intraday technicals are stretched in the European morning.  The PBOC's reference rate for the dollar of CNY6.9862 was a little weaker than the models suggested.  China's money market rates have fallen in recent days, and the 10-year yield fell three basis points to 2.91%, the lowest in a couple of weeks.   


Initially, Merkel and Macron proposed 500 bln euros in grants as the core of the Recovery Plan, and that apparently has been negotiated down to 390 bln and 360 bln in low-interest loans.  The rhetoric got brutal as Dutch Prime Minister Rutte, whose party has only half the seats in Parliament and hence in a vulnerable political position, was accused of blackmail.  European Council President Michel may have found a compromise with a handful of creditors, in part by granting nearly 53 bln euros in rebates (to Denmark, Germany, Netherlands, Austria, and Sweden).  Hungary appears to have secured a dilution of the "rule of law" conditionality, and the Article 7 procedures against it will be closed by the end of the year, according to reports. This may prove to be controversial for the European Parliament that also must approve the agreement.  Michel's compromise also includes some conditionality and a mechanism for qualified majority voting that dilutes the veto of the unanimity requirement. The newest proposal will be cast as more friendly for the creditor countries, it also injects more Europe into the Recovery Plan as well. Separately, EC is proposing to put a level on imports of goods from countries that have lower carbon emission standards than it does. 

The eurozone reported an 8 bln euro current account surplus for May.  In May 2019, its current account surplus was 23.3 bln euros.  In the first five months of 2020, the eurozone current account surplus has averaged 14.3 bln euros compared with 26.3 bln in the first five months of 2019.  Despite the falling external surplus, the euro is rising for the third consecutive month.  It is within striking distance (though probably not today) of the year's high a touch below $1.15.  The next target is last year's high set near $1.1570.  

The UK reported a June budget shortfall of GBP35.5 bln, which brings the deficit in the first three months of the new fiscal year to almost GBP128 bln.  That is a little more than double the deficit of the previous fiscal year.  The government is spending and cutting taxes by GBP190 bln to help cope with the pandemic.  A deficit of GBP370 is projected this fiscal year or around 19% of GDP.  Meanwhile, the Bank of England has purposefully not rejected a sub-zero base rate, and the yield curve is negative out seven years.  

The euro reached $1.1470 in Asia but has not been able to sustain the momentum.  There is an option for 650 mln euros at $1.15 that will be cut today.  It has found support near $1.1430 in the European morning—yesterday's low a hair above $1.1400.  A close below $1.1420 would be disappointing and would be the first close below the five-day moving average in nearly two weeks.  Note that an option for 1.3 bln euros at $1.1450 expires tomorrow.  Sterling rose above $1.27 for the first time in more than a month and briefly traded above its 200-day moving average (~$1.2705).  Here too, the early momentum could not be sustained, and sterling is consolidating in the European morning.  Initial support is seen near $1.2650.  After reaching almost GBP0.9140, a new high for July, the euro reversed course and settled below the pre-weekend low.  Follow-through selling today has seen the euro test GBP0.9000.  Last week's low was near GBP0.8945.  


The Trump Administration has two targets in mind with the sanctions and tariffs on China.  Of course, in the first instance, it wants China to change its behavior.  However, often overlooked is that it wants companies to change their behavior as well.  US Attorney General Barr was as explicit as any official has been:  Apple, Disney, and other companies are pawns of China.  Eleven more Chinese companies were put on the entity list for aiding human rights abuses.  Two of the companies claim to have previously supplied product for Apple and several popular clothing labels. It raises questions about the resilience of supply chains in China.  At the same time, last week,  Luxshare bought a couple of Wistron factories that assemble iPhones in China.  Apple now has a local partner.  Taiwanese companies appear to have a two-prong strategy to compete:  exit low margin-business and develop production facilities in India.

A Republican Senator from Louisana (Kennedy) has said he will support Shelton's controversial nomination to the Federal Reserve at the Senate Banking Committee today.  All 13 Republican Senators on the committee must approve her to take the vote to the entire Senate.  The other nominee Waller is considerably less controversial and will easily be approved. Separately, even though the Republicans have not entirely sorted out its fiscal stance, negotiations between Treasury Secretary Mnuchin and House leader Pelosi are set to get underway today.  There seem to be three key issues for Mnuchin: A payroll saving tax cut (strongly favored by the President), limiting the liability of businesses re-opening, and not a renewal of the $600 a week in federal unemployment assistance.   

Canada reports May retail sales today.  A sharp jump (~20%) is expected after a 26.4% plunge in May.  Canada will report June CPI figures tomorrow.  While the headline has been weak due to energy prices, among others, the underlying measures have held up considerably better.  Mexico reports May retail sales tomorrow.  A modest 3% rise is expected after tumbling 22.4% in April. 

The US dollar has pushed below the CAD1.35 support area, which also houses the 200-day moving average. It is testing the recent low near CAD1.3485 after posting an outside down day yesterday.  The June low would be the next obvious target, set near CAD1.3315.   The intraday technicals are stretched, suggesting that North American operators may have difficulty sustaining a significant range-extension now.  The greenback reversed lower against the Mexican peso yesterday as well.  Some follow-through selling has pushed it to around MXN22.3850 today (~MXN22.7650 was yesterday's high).  Support is seen near MXN22.25 and then MXN22.15.    


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Russia’s energy war: Putin’s unpredictable actions and looming sanctions could further disrupt oil and gas markets

Russian President Vladimir Putin has not hesitated to use energy as a weapon. An expert on global energy markets analyzes what could come next.




The new Baltic Pipe natural gas pipeline connects Norwegian natural gas fields in the North Sea with Denmark and Poland, offering an alternative to Russian gas. Sean Gallup/Getty Images

Russia’s effort to conscript 300,000 reservists to counter Ukraine’s military advances in Kharkiv has drawn a lot of attention from military and political analysts. But there’s also a potential energy angle. Energy conflicts between Russia and Europe are escalating and likely could worsen as winter approaches.

One might assume that energy workers, who provide fuel and export revenue that Russia desperately needs, are too valuable to the war effort to be conscripted. So far, banking and information technology workers have received an official nod to stay in their jobs.

The situation for oil and gas workers is murkier, including swirling bits of Russian media disinformation about whether the sector will or won’t be targeted for mobilization. Either way, I expect Russia’s oil and gas operations to be destabilized by the next phase of the war.

The explosions in September 2022 that damaged the Nord Stream 1 and 2 gas pipelines from Russia to Europe, and that may have been sabotage, are just the latest developments in this complex and unstable arena. As an analyst of global energy policy, I expect that more energy cutoffs could be in the cards – either directly ordered by the Kremlin to escalate economic pressure on European governments or as a result of new sabotage, or even because shortages of specialized equipment and trained Russian manpower lead to accidents or stoppages.

Dwindling natural gas flows

Russia has significantly reduced natural gas shipments to Europe in an effort to pressure European nations who are siding with Ukraine. In May 2022, the state-owned energy company Gazprom closed a key pipeline that runs through Belarus and Poland.

In June, the company reduced shipments to Germany via the Nord Stream 1 pipeline, which has a capacity of 170 million cubic meters per day, to only 40 million cubic meters per day. A few months later, Gazprom announced that Nord Stream 1 needed repairs and shut it down completely. Now U.S. and European leaders charge that Russia deliberately damaged the pipeline to further disrupt European energy supplies. The timing of the pipeline explosion coincided with the start up of a major new natural gas pipeline from Norway to Poland.

Russia has very limited alternative export infrastructure that can move Siberian natural gas to other customers, like China, so most of the gas it would normally be selling to Europe cannot be shifted to other markets. Natural gas wells in Siberia may need to be taken out of production, or shut in, in energy-speak, which could free up workers for conscription.

European dependence on Russian oil and gas evolved over decades. Now, reducing it is posing hard choices for EU countries.

Restricting Russian oil profits

Russia’s call-up of reservists also includes workers from companies specifically focused on oil. This has led some seasoned analysts to question whether supply disruptions might spread to oil, either by accident or on purpose.

One potential trigger is the Dec. 5, 2022, deadline for the start of phase six of European Union energy sanctions against Russia. Confusion about the package of restrictions and how they will relate to a cap on what buyers will pay for Russian crude oil has muted market volatility so far. But when the measures go into effect, they could initiate a new spike in oil prices.

Under this sanctions package, Europe will completely stop buying seaborne Russian crude oil. This step isn’t as damaging as it sounds, since many buyers in Europe have already shifted to alternative oil sources.

Before Russia invaded Ukraine, it exported roughly 1.4 million barrels per day of crude oil to Europe by sea, divided between Black Sea and Baltic routes. In recent months, European purchases have fallen below 1 million barrels per day. But Russia has actually been able to increase total flows from Black Sea and Baltic ports by redirecting crude oil exports to China, India and Turkey.

Russia has limited access to tankers, insurance and other services associated with moving oil by ship. Until recently, it acquired such services mainly from Europe. The change means that customers like China, India and Turkey have to transfer some of their purchases of Russian oil at sea from Russian-owned or chartered ships to ships sailing under other nations’ flags, whose services might not be covered by the European bans. This process is common and not always illegal, but often is used to evade sanctions by obscuring where shipments from Russia are ending up.

To compensate for this costly process, Russia is discounting its exports by US$40 per barrel. Observers generally assume that whatever Russian crude oil European buyers relinquish this winter will gradually find alternative outlets.

Where is Russian oil going?

The U.S. and its European allies aim to discourage this increased outflow of Russian crude by further limiting Moscow’s access to maritime services, such as tanker chartering, insurance and pilots licensed and trained to handle oil tankers, for any crude oil exports to third parties outside of the G-7 who pay rates above the U.S.-EU price cap. In my view, it will be relatively easy to game this policy and obscure how much Russia’s customers are paying.

On Sept. 9, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control issued new guidance for the Dec. 5 sanctions regime. The policy aims to limit the revenue Russia can earn from its oil while keeping it flowing. It requires that unless buyers of Russian oil can certify that oil cargoes were bought for reduced prices, they will be barred from obtaining European maritime services.

However, this new strategy seems to be failing even before it begins. Denmark is still making Danish pilots available to move tankers through its precarious straits, which are a vital conduit for shipments of Russian crude and refined products. Russia has also found oil tankers that aren’t subject to European oversight to move over a third of the volume that it needs transported, and it will likely obtain more.

Traders have been getting around these sorts of oil sanctions for decades. Tricks of the trade include blending banned oil into other kinds of oil, turning off ship transponders to avoid detection of ship-to-ship transfers, falsifying documentation and delivering oil into and then later out of major storage hubs in remote parts of the globe. This explains why markets have been sanguine about the looming European sanctions deadline.

One fuel at a time

But Russian President Vladimir Putin may have other ideas. Putin has already threatened a larger oil cutoff if the G-7 tries to impose its price cap, warning that Europe will be “as frozen as a wolf’s tail,” referencing a Russian fairy tale.

U.S. officials are counting on the idea that Russia won’t want to damage its oil fields by turning off the taps, which in some cases might create long-term field pressurization problems. In my view, this is poor logic for multiple reasons, including Putin’s proclivity to sacrifice Russia’s economic future for geopolitical goals.

A woman walks past a billboard reading: Stop buying fossil fuels. End the war.
Stand With Ukraine campaign coordinator Svitlana Romanko demonstrates in front of the European Parliament on Sept. 27, 2022. Thierry Monasse/Getty Images

Russia managed to easily throttle back oil production when the COVID-19 pandemic destroyed world oil demand temporarily in 2020, and cutoffs of Russian natural gas exports to Europe have already greatly compromised Gazprom’s commercial future. Such actions show that commercial considerations are not a high priority in the Kremlin’s calculus.

How much oil would come off the market if Putin escalates his energy war? It’s an open question. Global oil demand has fallen sharply in recent months amid high prices and recessionary pressures. The potential loss of 1 million barrels per day of Russian crude oil shipments to Europe is unlikely to jack the price of oil back up the way it did initially in February 2022, when demand was still robust.

Speculators are betting that Putin will want to keep oil flowing to everyone else. China’s Russian crude imports surged as high as 2 million barrels per day following the Ukraine invasion, and India and Turkey are buying significant quantities.

Refined products like diesel fuel are due for further EU sanctions in February 2023. Russia supplies close to 40% of Europe’s diesel fuel at present, so that remains a significant economic lever.

The EU appears to know it must kick dependence on Russian energy completely, but its protected, one-product-at-a-time approach keeps Putin potentially in the driver’s seat. In the U.S., local diesel fuel prices are highly influenced by competition for seaborne cargoes from European buyers. So U.S. East Coast importers could also be in for a bumpy winter.

This article has been updated to reflect conflicting reports about the draft status of Russian oil and gas workers.

Amy Myers Jaffe does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.




Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…



Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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