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Futures Drifts As Gold Soars

Futures Drifts As Gold Soars

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Futures Drifts As Gold Soars Tyler Durden Wed, 07/08/2020 - 08:00

S&P futures traded in a narrow range even as European stocks slid amid new tensions between Washington and Beijing, as well as worries that an alarming rise in coronavirus caseloads across the country pose a risk to the recovery in business activity and will hit consumer spending. The dollar was flat as gold continued its surge, rising  above $1,800 and rapidly approaching its Sept 2011 all time high.

Global markets have been struggling for traction ever since the Fed's balance sheet started shrinking modestly in mid-June...

... after a sharp rally last week amid concern it’ll take a long time for the broader economy to recover from the pandemic. Many Americans are planning to spend less on things like movies, event tickets or at bars, even as states allow businesses to start re-opening, according to Bloomberg.

On Tuesday the Nasdaq notched yet another intraday record high but all the three main stock indexes finished lower as investors booked profits following a strong run after a batch of upbeat data strengthened the case for a bounce back in economy.

European shares gave up gains early in the trading session after Hungarian Prime Minister Viktor Orban said regional leaders will probably fail to agree on a massive spending plan aimed at reviving their economies. Negotiations at a summit next week will be "very tough" and will likely need to continue throughout the summer, he said.

“It’s not unusual for stocks to take a breather at this point,” Susan Schmidt, a portfolio manager at Aviva Investors, said on Bloomberg TV. “We could see ourselves in a bit of a trading range in the next couple of weeks,” before U.S. earnings season ramps up.

Asian stocks were little changed, with communications rising and industrials falling, after falling in the last session. Most markets in the region were up, with Jakarta Composite gaining 1.8% and the Shanghai Composite rising 1.7%, its seventh daily rise in a row to the highest level since the 2018 start of the U.S.-China trade war, with Nanjing Iron & Steel and Jilin Yatai posting the biggest advances.

Trading volume for MSCI Asia Pacific Index members was 69% above the monthly average for this time of the day. The Topix declined 0.9%, with Teac and Airtech Japan falling the most. Australia's S&P/ASX 200 dropped 1.5%. Emerging-market equities resumed gains, heading for the highest level since February.

China stocks rose even as HSBC Holdings slumped after a report that some of Donald Trump’s advisers proposed a move to destabilize Hong Kong’s currency peg to the dollar as a way of punishing China.

Meanwhile, China on Wednesday said it will restrict visas for U.S. officials for what it called “egregious” behavior over Tibet,  reciprocating a move announced by Secretary of State Michael Pompeo a day earlier.

Eastern European currencies weakened, while gains for the Mexican peso and South African rand limited losses on the MSCI Inc.’s gauge for emerging-market exchange rates. Stock market gains in China have even pushed the country’s financial publications to caution investors about overheating. But as The Trump administration is said to be considering options to punish China for recent moves to chip away at Hong Kong’s political freedoms, markets “appear to be learning to look past the noise,” according to Credit Agricole’s Eddie Cheung. “While valuations would suggest that there is ground for China’s markets to continue to rally, it remains to be seen whether that alone can continue to be a driving force regionally, especially with Western markets trading more tentatively,” the Hong Kong-based strategist said in note.

In rates, Treasuries were slightly weaker across the curve on low volumes, with long-end yields higher by 1bp and front end little changed. Price action creates small concession in 7- to 10-year sector for $29b 10-year note auction at 1pm ET that may draw a record low yield. Treasury 10-year yields hover around 0.65% ahead of auction, steepening 2s10s by 0.8bp; bunds outperform by 3.5bp vs. Treasuries, gilts by 2.5bp. Futures volumes as of 7am ET were 70% to 90% of 20-day average levels across the curve, Bloomberg reported. German Bunds bull-flattened, outperforming Treasuries.

In FX, the dollar erased a decline as investors measured signs of renewed political tension between the U.S. and China. Hong Kong’s Dollar remained at the strong end of its established trading range after a report that advisers to President Trump suggested undermining the currency’s peg to the greenback after Beijing’s moves to curb the island’s political freedoms. Australia’s dollar weakened against all of its Group-of-10 peers after rising infection rates in the nation’s second-most populous state and S&P Global Ratings warned that the return to lockdown in Victoria would put pressure on its economic recovery. “From an economic point of view, this is potentially disastrous,” said Michael McCarthy, chief market strategist with CMC Markets Asia Pacific. "Forex traders are certainly expressing their growth outlook worries by selling the Aussie, and we’re likely to see support for the havens like the dollar, yen and Swiss franc."

In commodities, the biggest mover was once again gold, which continues its tremendous ascent, topping $1,800 an ounce, with silver needing to catch up.

Upside in WTI and Brent front month contracts were hampered by a surprise build in private inventories (crude stocks +2mln vs. Exp. -3.1mln), and the relevant headlines overnight were also on the bearish side with ADNOC set to boost oil exports next month and Total’s Port Arthur refinery said to be running at 60% capacity due to subdued demand.

Looking at the day ahead now, we have central bank speakers including ECB Vice President de Guindos and the Fed’s Bostic, while data releases from the US include consumer credit for May and the weekly MBA mortgage applications.

Market Snapshot

  • S&P 500 futures up 0.2% to 3,143.25
  • STOXX Europe 600 down 0.3% to 367.88
  • MXAP up 0.07% to 164.44
  • MXAPJ up 0.5% to 544.63
  • Nikkei down 0.8% to 22,438.65
  • Topix down 0.9% to 1,557.23
  • Hang Seng Index up 0.6% to 26,129.18
  • Shanghai Composite up 1.7% to 3,403.44
  • Sensex up 0.04% to 36,687.46
  • Australia S&P/ASX 200 down 1.5% to 5,920.30
  • Kospi down 0.2% to 2,158.88
  • German 10Y yield fell 1.6 bps to -0.445%
  • Euro up 0.1% to $1.1286
  • Italian 10Y yield fell 3.6 bps to 1.077%
  • Spanish 10Y yield fell 1.0 bps to 0.415%
  • Brent futures down 0.2% to $43/bbl
  • Gold spot up 0.2% to $1,797.93
  • U.S. Dollar Index up 0.1% to 97

Top Overnight News

  • Some top advisers to President Donald Trump want the U.S. to undermine the Hong Kong dollar’s peg to the U.S. dollar as the administration considers options to punish China for the recent imposition of a security law in the former British colony.
  • The threat of U.S. action to undermine Hong Kong’s longstanding U.S. dollar peg is highly unlikely to become reality given the practical difficulties of pursing such a path and the damage it would do to U.S. interests, economists say.
  • HSBC Holdings Plc, which draws more than two-thirds of its pretax income from Hong Kong, slumped as advisers to U.S. President Donald Trump were also said to be discussing measures against banks there.
  • Boris Johnson warned Germany’s Angela Merkel that the U.K. is ready to do without a trade deal if the European Union wasn’t prepared to compromise.
  • Japan’s investors are flocking to Australia’s sovereign bond market, lured by cheaper currency-hedging costs and some of the highest yields among developed nations.

Asian equity markets were mixed as attempts to shrug off the weak handover from global peers were somewhat hindered by the record infection rates stateside and a slew of punchy US-China related headlines. ASX 200 (-1.5%) was subdued as Australia’s 2nd largest city heads into a 6-week lockdown and with the declines in the index led by notable losses in consumer stocks and financials, while Nikkei 225 (-0.8%) was pressured by the ongoing virus flare up in Tokyo where more than 100 new cases were reported for a 6th consecutive day, but with downside stemmed after data showed the largest increase in bank lending on record. Hang Seng (+0.6%) and Shanghai Comp. (+0.7%) were supported as the latest coronavirus updates from Beijing showed zero new cases for a 2nd consecutive day although caution was also observed on the inauguration day of China’s national security office in Hong Kong and as reports continued to suggest increasing tensions between the world’s largest economies. This includes confirmation by US President Trump that he is looking at banning TikTok in the US and his administration also warned the Railroad Retirement Fund against Chinese investments due to risks of additional sanctions, while the White House is considering executive actions which involve targeting Chinese businesses operating in the US and aides were also said to propose undermining the USD/HKD peg although this was not put forward to President Trump and certain officials have opposed the idea. Finally, 10yr JGBs were initially copy as they conformed to the unsettled overnight tone across asset classes, but eventually edged only marginal gains amid a subdued risk tone in Tokyo and the BoJ’s presence in the market for JPY 870bln of government bonds with up to 5yr maturities.

Top Asian News

  • AirAsia Is Said to Weigh Raising $234 Million Via Rights Issue
  • Itochu Makes $5.4 Billion Bid for Rest of Japan’s FamilyMart
  • Hong Kong’s Resilient Markets Just Knocked Down Another Big Test
  • Singapore in Survival Mode Looks to Reinvent Itself. Again

European stock markets initially attempted to nurse losses seen at the open before losing steam as the mid-week session goes underway [Euro Stoxx 50 -0.9%], following on from a mixed APAC lead overnight. Fresh fundamental newsflow has been light for the session, with the calendar also sparse, albeit key risk events, aside from COVID-19 US-China headlines, could include UK Chancellor Sunak’s fiscal unveiling alongside the European Commission’s potential compromise recovery fund proposal. Sectors are all in negative territory with a clear defensive bias, with the detailed breakdown also painting a similar picture. Financial names underperform, likely on the back of HSBC (-4.0%) amid reports President Trump’s aides were said to propose undermining the USD/HKD peg, although the idea had not been put forward to President Trump and certain officials opposed the idea. In terms of other individual movers, Nokia (-7.5%) shares extend on losses amid a negative broker move coupled with speculation that Verizon may be dropping the Co. as a 5G partner, Nokia stated that it continues working with Verizon amidst these reports. On the flip side, Deutsche Post (+0.8%) remains buoyed after reporting an improvement in Q2 prelim figures whilst noting FY22 EBIT in the least favourable case of EUR 4.7bln and the most favourable case in excess of EUR 5.3bln.

Top European News

  • Serbia’s Vucic Sees Rising Risk of Regional Conflict in Europe
  • Volkswagen Management Tumult Spills Over to Truck Subsidiary
  • Medtronic Is Said to Make Offer for Medical Device Maker Intersect
  • Analysts Applaud Deutsche Post Earnings, Dividend Proposal

In FX, the Dollar and its G10 currency counterparts are stuck in a rut after 2 volatile sessions, but ultimately no clear direction amidst fluctuating and flaky risk sentiment on coronavirus updates interspersed with economic data and surveys supporting the recovery from first wave pandemic lows. Major pairings are muted and the subdued state of affairs exemplified by the DXY showing little sign or inclination to stray too far either side of the 97.000 level that has been magnetic of late. Moreover, Wednesday’s agenda does not bode well in terms of market-moving potential, barring any surprises from UK Chancellor Sunak and/or an unscheduled event given a blank US agenda beyond weekly mortgage applications and then consumer credit.

  • CHF/EUR/CAD - All marginally firmer against the Greenback, but within relatively tight confines as noted above, as the Franc hovers just below 0.9400, Euro shy of 1.1300 where a hefty 1.9 bn option expiry resides and Loonie pivots 1.3600 ahead of Canadian housing starts and an update from Finance minister Morneau on the economy in context of measures taken to combat COVID-19.
  • JPY/XAU/NZD/GBP/AUD - The Yen remains tethered between 107.70-40 parameters with a light underlying bid that is also apparent in Gold as bullion continues its assault on Usd 1800/oz, while the Kiwi is still straddling 0.6550 and fractionally outpacing the Aussie around 1.0600 in cross terms due to the return to lockdown in Melbourne. As such, Aud/Usd is capped circa 0.6950 in similar vein to Cable on the 1.2550 axis in advance of the aforementioned Economic Update. Note, contacts are touting stops at 1.2530 that are currently being tested and could be filled in conjunction with the absorption of offers in Eur/Gbp close to 0.9000.
  • SCANDI/EM - Not much lasting reaction to weaker than forecast Norwegian GDP data hot on the heels of a drop in manufacturing output yesterday, with Eur/Nok flitting either side of 10.7000 and Eur/Sek likewise around 10.4300. However, more pronounced activity in the Hkd overnight following reports that the US may target the peg in response to China’s security legislation with the HKMA forced into concerted intervention.                

In commodities, a choppy session thus far for the crude complex, albeit prices remain somewhat flat and within tight ranges amid a lack of notable catalysts. Overnight, upside in WTI and Brent front month contracts were hampered by a surprise build in private inventories (crude stocks +2mln vs. Exp. -3.1mln), while the relevant headlines overnight were also on the bearish side with ADNOC set to boost oil exports next month and Total’s Port Arthur refinery said to be running at 60% capacity due to subdued demand. On the flip side, EIA lifted 2020 world oil demand growth forecast by 190k BPD (to 8.15mln BPD Y/Y fall) but cut 2021 world oil demand growth view by 190k BPD (to 6.99mln BPD Y/Y increase) – with participants awaiting the IEA report on Friday. Looking ahead, aside from COVID-19 headlines and sentiment-driven moves, the complex will likely eye the weekly DoE release for confirmation of the Private Inventory data, whilst State-side production will also be in focus as some believe output has bottomed. Elsewhere, spot gold has extended on gains but has decoupled from its safe-haven status, whilst Dollar dynamics also provided little influence on prices. The yellow metal has eclipsed the 1800/oz mark for the first time since 2012 before immediately running into selling pressure at the key figure. Copper meanwhile briefly topped USD 2.8/lb to levels last seen in January amid supply woes coupled with hopes of a rebounding Chinese economy.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -1.8%
  • 3pm: Consumer Credit, est. $15.0b deficit, prior $68.8b deficit

DB's Jim Reid concludes the overnight wrap

Yesterday I boasted about nearly 5 year old Maisie winning a race at Sports Day. I’ve since got the video from the school and I must admit if I was another parent I would be questioning whether she false started. Put kindly she anticipated the “B” of the Bang a bit too perfectly. Still a victory is a victory. On that the latest in my 15 month journey to remodel my golf swing left me finishing 3rd last in the first cup competition at my club after lockdown on Sunday. It was my worst round since I was 11. You may say that at least I wasn’t last. However I should add that the two below me were octogenarians who were only too delighted to be out after isolating during lockdown. Meanwhile I’ve been practising hard most evenings where I can. I have a heart to heart planned with my golf coach tomorrow night to see if there is any light at the end of the tunnel. He says I’m on the verge of a major breakthrough. I feel I’m on the edge of a breakdown.

Markets broke down yesterday, albeit nowhere near as much as my golf swing. A drip-feed of negative stories on the economic outlook as well as covid headlines from all around the world dampened investor sentiment. By the end of the session, the S&P 500 had fallen -1.08%, and unable to reach a 6th successive move higher which would have been a first since April 2019. Over 85% of the index was lower on the day, with the worst performing industries being energy (-3.18%) and banks (-3.16%). Tech stocks outperformed slightly, with the NASDAQ down -0.86%. The Dow Jones was the worst performer, down -1.51% (Boeing -4.8% and Goldman Sachs -3.9%). Bourses also fell across Europe with the STOXX 600 (-0.61%) and DAX (-0.92%) lower. Just like with the S&P, European banks were among the worst performers, with the STOXX Banks index down by -1.34%.

Markets in Asia are a bit more mixed this morning. While we’ve seen modest declines for the Nikkei (-0.24%), Kospi (-0.29%) and ASX (-0.61%), the Shanghai Comp (+0.74%) and Hang Seng (+0.34%) are up along with S&P 500 futures (+0.20%). The main talking point overnight has been a Bloomberg story suggesting that some top advisers in the Trump administration are weighing proposals to undermine Hong Kong’s dollar peg to the greenback as a way of penalizing China. However, the report added that the idea has not been pitched to senior levels of the White House which suggests that it hasn’t gained serious traction yet.

Back to yesterday and after Senate Majority Leader McConnell signalled a willingness to pass another stimulus bill with case numbers rising across the country, the White House announced they want the package by the first week of August. Vice President Pence’s top aide said, “we want to make sure that people that are still unemployed or hurting are protected but at the same time, we want to take into consideration the fact the economy is bouncing back and want to try to contain the amount of spending.” This is aligned with Senate Republicans who want to keep the overall price tag south of $1 trillion. President Trump said that there would be another round of stimulus checks for Americans, though it will likely be even more targeted this time around. With some states pausing reopening and even re-entering shutdowns, additional stimulus is likely needed in order for economic data to continue improving.

Meanwhile, the slowdown in reopenings continues to be driven by the US seeing high numbers of new cases. Texas had over 10,000 new cases in one day for the first time yesterday, with cases rising 5% compared to a weekly average of 3.9%. Daily increases in some other recent hot spots were below the weekly average, which while encouraging may still be experiencing after-effects of the holiday weekend. Florida reported a 3.6% rise in new cases, under the 5% 7-day average, however the 7-day rolling total of 61,360 cases was the highest yet. Fatalities rose by 1.7%, with the 7-day average at just under 48 per day. Arizona meanwhile recorded a record 98 new fatalities yesterday, however the data has clearly seen big lags on Sunday and Monday in the past. Overall the 7 day average of covid fatalities in the state is roughly 40 per day, while cases are rising by just under 3700 per day. When New York state was at 3700 and 8700 (similar to Florida now), it was seeing around 85 and 630 deaths per day, and so both Arizona and especially Florida are seeing better case fatality rates at this time. However, this could change and requires a high level of scrutiny as hospital conditions and capacity constraints are going to be different in different regions. Speaking of New York, the state continues to add more regions to its quarantine list, which is now 19 states long, with Delaware, Kansas and Oklahoma travellers all being asked to isolate for 14 days upon arriving. Overnight, the US Department of Health and Human Services has said that it is ramping up coronavirus testing in Louisiana, Texas and Florida as health officials attempt to get a firm grasp on how the fast-moving pandemic is evolving.

For more details on the current US virus outbreak and what it could mean for upcoming policy decisions, you can join a conference call today at 11:00 EDT/16:00 UK time hosted by our chief US economist Matt Luzzetti. He will be joined by two guest speakers to discuss the outlook for health policy and small businesses. You can find the full details here.

Back to markets and it’s fair to say that the huge pre-covid momentum into ESG was temporarily sidetracked by the pandemic. However this is undoubtedly a multi-year trend and there are signs the topic is springing back to life. Here at Deutsche Bank Research we have launched dbSustainability, a new offering with research reports focused on sustainability issues and spanning thematic, macro, quantitative and individual company analysis. Recent reports include; ‘ESG through the pandemic’. Luke Templeman, Thematic Research (link to report and video), ‘Decarbonisation: Can Mining & Steel sustain in a low carbon world?’ from Head of European Mining And Metals, Liam Fitzpatrick (link to report) and from Juliana Lee, Chief Economist, Asia, ‘Asia Thematic Analysis:Households' ESG action’ (link to report). We will continue to put out research under this banner so best to let Luke.Templeman@db.com on my team know if you want to be added to any future reports. He is on hols but he’ll pick up and add you on Monday.

In terms of those economic stories we alluded to earlier, we firstly had some underwhelming numbers on German industrial production, which saw just a +7.8% increase in May. This was lower than the +11.1% rebound expected and still leaves IP -19.3% below its levels a year earlier. Furthermore, it comes just a day after some worse-than-expected data on factory orders, adding to fears that the German recovery won’t be as rapid as hoped for. Next, we had the European Commission’s summer economic forecasts, which revised down their economic forecasts for Euro Area growth both this year and next. They now see the economy contracting by -8.7% this year compared with -7.7% before back in May. And 2021 growth was revised down two-tenths to +6.1%. And finally, we had a warning from Atlanta Fed President Bostic in the FT yesterday, who said that the high-frequency data had pointed to a “levelling off” in activity. We also heard from the Fed’s Vice Chairman Clarida later who said that the Fed can turn to additional forward guidance and asset purchases if the economy needs more aid and Cleveland Fed President Loretta Mester said that “If we don’t get further fiscal support, things won’t come back as well as they could” while adding, with disruption from the virus lasting longer than expected, “this is a period where we need to be supporting both individuals and businesses who but for the pandemic would have been healthy.”

Given this negative newsflow yesterday, safe havens performed relatively strongly, and gold hit another milestone as it closed above its 2012 peak to reach an 8-year high of $1795/oz. Other metals performed reasonably well too, with copper up +0.78% to advance for a 6th successive session. Over in fixed income, there was clear differentiation in core sovereign bonds, with yields on 10yr Treasuries down -3.6bps and those on bunds up +0.2bps. However that mostly reflected a post European close rally for USTs. There was a further narrowing in peripheral spreads however, with yields on Italian 10yr debt over bunds falling by -3.8bps to 163bps, their tightest level since late March, and Greek spreads down -3.7bps to their tightest since late February.

Here in the UK, sterling was the strongest performing of the G10 currencies yesterday, as it strengthened by +0.46% against the US dollar. It comes ahead of Chancellor Sunak’s much-awaited “Summer Economic Update” before the House of Commons today, in which he’s expected to announce a package of measures to aid the economic recovery. We’ve already had some announcements in recent days, with Prime Minister Johnson announcing last week that £5bn of capital investment projects would be brought forward, as well as a subsequent £1.57bn package for the arts. Our UK economists’ base case is that Sunak will broadly stick to the mandate set out by PM Johnson last week, possibly topping up the package by another 0.2% of GDP, focusing particularly on apprenticeship schemes, and modest wage subsidies to get furloughed employees back into work. There’s certainly been a fair amount of speculation in the media as to what to expect, including reports that a Stamp Duty holiday could be announced on homes under £500k.

Elsewhere in Europe, we heard from ECB Executive Board member Schnabel, who said in an interview that positive confidence indicators “suggests that the recession could turn out somewhat milder than expected”. She also waded in to the debate on the EU recovery fund, saying to the Dutch newspaper NRC Handelsblad that “If most of the fund is made up of loans, this could create a public debt overhang after the crisis. That could then cause problems of its own.” It comes ahead of the summit of EU leaders in just over a week, which is scheduled to begin on 17 July.

There wasn’t a great deal of other data yesterday, though the number of job openings in the US unexpectedly increased in May to 5.397m (vs. 4.5m expected), while the number of hirings rose to a record high of 6.487m. Furthermore, in a sign of the labour market recovery, the quits rate of voluntary separations that generally correlates with economic strength ticked up to 1.6% from 1.4% the previous month, even if it still remained some way down from the 2.3% recorded in February. Our US Economist Matt Luzzetti noted that private quits rate is a good leading indicator for wage growth and it remained low at 1.8%, down from a 2.6% peak late last year. This indicated that there could be a collapse in wage growth in the coming months. The ratio of unemployed people per job opening remained elevated in May, with 3.9 unemployed per job opening. This compares to a sub-1.0 figures late last year, however it is well below GFC levels of over 6.0. Lastly, he noted that change in job openings can proxy for employment data and that doing so would suggest that job loss was much more extreme in March, less extreme in April, and not as robust in May, with 2.4m jobs created vs the NFP tally of 3.2m.

To the day ahead now, and one of the highlights will be the previously mentioned UK economic statement from Chancellor Sunak. Central bank speakers today include ECB Vice President de Guindos and the Fed’s Bostic, while data releases from the US include consumer credit for May and the weekly MBA mortgage applications.

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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.

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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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Spread & Containment

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.

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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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Economics

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…

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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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