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Global Stocks Slide After Fed Minutes Disappoint

Global Stocks Slide After Fed Minutes Disappoint

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Global Stocks Slide After Fed Minutes Disappoint Tyler Durden Thu, 08/20/2020 - 08:03

US equity futures, Asian and European markets fell on Thursday after the U.S. Federal Reserve’s latest meeting minutes did not guide to more easing or hint at yield curve control while highlighting doubts about the recovery of the world’s largest economy which knocked the S&P500 from its record highs, although sentiment got a modest boost overnight after China announced it had agreed with the US to resume trade talks "in the coming days" to evaluate the progress of their Phase 1 trade deal.

Among early movers, Nvidia Corp slipped 1.1% in premarket trade after results from the data center business of the rising semiconductor industry star disappointed some investors. Intel Corp rose 4% after announcing an accelerated $10-billion share buyback plan. L Brands rose 1.3% after reporting a surprise quarterly profit, boosted by strong demand for Bath & Body Works’ products as well as higher online sales of Victoria’s Secret lingerie.

Markets stumbled after the Fed’s minutes from its July meeting highlighted doubts about the U.S. economic recovery, showing that the swift labor market rebound seen in May and June had likely slowed. "Of course, the Fed agreed that the virus is weighing heavily on the economy: is that some kind of surprise? Apparently it was," Rabobank’s global strategist Michael Every wrote in a note to clients.

Yet despite the overall dovish sentiment, U.S. Treasury yields and the dollar surged with investors focusing on parts of the minutes that showed policymakers downplaying the need for yield caps and targets, nor did they hint at any additional QE.

"There is still a fair amount of uncertainty around the path of the coronavirus, through the flu season, and what that may mean for economic growth,” Jim McDonald, chief investment strategist at Northern Trust, said on Bloomberg TV. “Stocks are somewhat expensive here - we struggle to get to a meaningful positive return on stocks over the next year just because we’ve priced in so much of a recovery already."

As Bloomberg notes, equities in several continents are seeing fresh weakness as investors debate whether momentum that pushed the S&P 500 to a record high this week can be sustained amid lofty valuations and delays in further stimulus to counter the pandemic. While France, Spain and Austria reported the highest daily infections in months, cases have subsided in a few populous U.S. states. Weekly unemployment figures are due in Washington later Thursday.

"The key question for investors is whether the policy responses are enough to mitigate the economic damage,” hedge fund firm Brevan Howard said in an interim report published on Thursday.  "Many businesses face solvency risks that are not addressed by borrowing; a debt overhang cannot be cured by more borrowing no matter how cheap it may be,” the fund’s report added.

“Improved financial conditions are narrowly focused on a handful of large companies and benefiting stakeholders who need relatively little economic assistance. The result is that financial assets are expensive by many standard metrics. So long as a V-shaped recovery in risky assets fails to create a V-shaped recovery in economic activity, this tension is a recipe for increased volatility."

The MSCI world equity index was also impacted, sliding 0.6% early on Thursday. The pan-European STOXX 600 was down 0.9% and London’s FTSE 100 fell 0.8%. European equities slumped following a downbeat Asian session. Eurostoxx 50 dropped as much as 1.5%, with the CAC lagging peers. Miners, banking names and financial services are the worst performing sectors; real estate manages small gains

Earlier in the session, MSCI’s index of Asia-Pacific shares outside Japan had its biggest daily decline in five weeks. All markets in the region were down, with South Korea's Kospi Index dropping 3.7% and Taiwan's Taiex Index falling 3.3%. The Topix declined 0.9%, with Carta Holdings Inc and Mitani Sekisan falling the most. The Shanghai Composite Index retreated 1.3%, with Junzheng Energy and Yijiahe Tech posting the biggest slides. Hong Kong stocks fell for a second session as the U.S. suspended its extradition treaty with Hong Kong and ended reciprocal tax treatment with the former British colony.

In FX, the dollar index was choppy overnight after yesterday's sharp spike but appeared to resume rolling over following the news the US and China had agreed to resume trade talks.

Elsewhere, the euro fluctuated ahead of the release of the ECB meeting’s minutes, and the Norwegian Krone slipped after Norges Bank announced it will probably keep interest rates at a record low for "some time ahead." The Turkish lira tumbled after the central bank kept rates on hold. The CBRT also increased required FX reserves ratio for banks that meet growth target by 700bps for all maturities for precious metal repo accounts; all other RRR for FX raised by 200bps.

Treasuries reversed their Wednesady slump and were higher across the curve, led by the long end, amid gains for most developed sovereign bond markets and declines for equities globally. Yields are lower by about 4bp at long end, 10-year by ~3bp at 0.65%, flattening 2s10s and 5s30s curves by ~2bp; S&P 500 futures are lower after cash index Wednesday declined from a record high. 20-year yield is lower by 3bp at 1.165%. The new 20-year bond, which got a cool reception at Wednesday’s auction, is trading at a profit, as are the new 10-year and 30-year issues sold last week. This week’s final auction, a $7b 30-year TIPS reopening, is ahead at 1pm ET.

Germany’s benchmark 10-year Bund yield was at -0.473%, little changed after falling for the past four days in a row. Three-month Euribor fell to a record low, less than four months after rising to a four-year high, helped by the ECB’s policy to provide lenders with cheap loans in response to the economic damage of the pandemic.

In commodities, spot gold rebounded overnight, after declining to a near one-week low on Wednesday, when markets were more bullish. It was up 0.6% at $1,940.4478 per ounce. Oil prices fell, as major producers warned of a risk to demand recovery. OPEC and its allies pressed oil nations that are pumping above output targets to cut more in August to September. Brent crude was down 32 cents, or 0.7%, at $45.05 a barrel while WTI was down 38 cents, or 0.9%, at $42.55 a barrel.

Overnight, U.S. Congressional leaders hinted they were looking for a path toward reviving stalled talks on the next round of pandemic relief - even as both sides remain far from a deal. Any accord is still likely to wait until September despite the fact that the U.S. economy is limping along with many businesses still struggling and millions of Americans out of work.

On the day's calendar, data from the Labor Department, due at 8:30 a.m. ET (1230 GMT), is expected to show the number of Americans seeking jobless benefits dipped to 925,000 in the week ended Aug. 15.

Market Snapshot

  • S&P 500 futures down 0.4% to 3,360.00
  • Brent futures down 0.8% to $45.00/bbl
  • Gold spot up 0.3% to $1,934.33
  • U.S. Dollar Index up 0.3% to 93.16
  • Stoxx Europe 600 down 1.4% to 364.59
  • MXAP down 1.6% to 169.27
  • MXAPJ down 1.8% to 557.36
  • Nikkei down 1% to 22,880.62
  • Topix down 0.9% to 1,599.20
  • Hang Seng Index down 1.5% to 24,791.39
  • Shanghai Composite down 1.3% to 3,363.90
  • Sensex down 1.2% to 38,160.20
  • Australia S&P/ASX 200 down 0.8% to 6,120.02
  • Kospi down 3.7% to 2,274.22
  • German 10Y yield fell 1.2 bps to -0.484%
  • Euro down 0.2% to $1.1818
  • Italian 10Y yield fell 1.3 bps to 0.788%
  • Spanish 10Y yield rose 1.1 bps to 0.303%

Top Overnight News from Bloomberg

  • U.S. central bankers backed off in July from an earlier readiness to set a clearer bar for raising interest rates, a step that would underscore their commitment to an extended period of ultra-loose monetary policy
  • Coronavirus infections flared in Europe, with France and Spain reporting their biggest increases in months. South Korea confirmed 288 more cases, while Hong Kong’s outbreak showed signs of easing
  • French president Emmanuel Macron ruled out shutting down the country once again even as the virus resurges across several European nations. He said the “collateral damage of confinement is considerable”. Cases in France were up 3,776, the most in three months, while Spain recorded 3,715 new infections. Germany recorded more than 1,000 new infections for the third day in a row.
  • Russia’s opposition leader Alexey Navalny is in intensive care in “serious condition” with suspected poisoning. Navalny is Russia’s most prominent opponent to Vladimir Putin.
  • As Brexit trade talks approach their deadline, the European Union’s top markets regulator called for rule changes that could limit firms’ ability to manage money in the bloc from London.
  • China and the U.S. will hold talks in the near term to discuss the progress of their trade deal, Beijing said, without mentioning a precise date, after last week’s call was postponed.
  • Three-month Euribor fell to a record low, less than four months after rising to a four-year high, helped by the ECB’s policy to provide lenders with cheap loans in response to the economic damage of the pandemic.
  • The U.S. suspended its extradition treaty with Hong Kong and ended reciprocal tax treatment on shipping with the former British colony, the latest salvo in escalating tensions between Washington and Beijing
  • President Donald Trump said he would call on the United Nations Security Council to restore all nuclear- related sanctions on Iran, an attempt to kill off the 2015 nuclear agreement and force Tehran back to the negotiating table
  • OPEC+ kept up the pressure on Nigeria and Iraq to stop cheating on their crude-production targets, emphasizing the need for all members to stick closely to their agreement because the market recovery remains fragile
  • Kamala Harris, the California senator Joe Biden selected as his running mate, opened the third night of the Democrats’ virtual convention by urging the party to defy what she called a Republican effort to suppress their votes

Asian equity markets traded lower across the board amid headwinds from Wall St where stocks faltered in the aftermath of the less accommodative than expected FOMC Minutes which triggered a pullback in the S&P 500 and the Nasdaq from record highs, while Apple shares also retraced the majority of the early gains that had briefly pushed the tech giant to the unprecedented USD 2tln market cap status. ASX 200 (-0.8%) was pressured by a slate of weak earnings and with underperformance seen in energy names, while Nikkei 225 (-1.0%) retreated below the 23,000 level with Tokyo exporters dragged by a predominantly firmer currency. Hang Seng (-1.5%) and Shanghai Comp. (-1.3%) conformed to the downbeat tone after the US State Department either suspended or terminated three bilateral agreements with Hong Kong and reports also suggested the likelihood of a RRR cut this year has declined with the central bank expected to inject liquidity through reverse repos and MLF operations instead. In addition, the PBoC maintained the 1-year and 5-year Loan Prime Rates at 3.85% and 4.65% as expected, while there were reports US and Chinese trade negotiators plan to confer by video in the coming days regarding the Phase 1 trade deal progress and US actions against Chinese tech firms, although this failed to provide any support for stocks. Finally, 10yr JGBs were initially kept afloat by the risk averse tone but with the upside restricted following the post-FOMC pressure in T-notes and with participants sidelined heading into the 5yr JGB auction which turned out to a be a weaker than previous auction and subsequently weighed on prices.

Top Asian News

  • Saudi Support for 2002 Plan Shows It Won’t Copy UAE-Israel Pact
  • RBL Bank to Raise $209 Million With Preference Share Sale
  • Thailand Arrests Leaders of Protests Challenging the Monarchy
  • Philippines Central Bank Pauses After Series of Rate Cuts

European equities trade lower across the board (Eurostoxx 50 -1.3%) as market participants digest the fallout of the FOMC minutes which were judged to be less dovish than some had hoped for. Furthermore, geopolitical tensions have been ratcheted up once again in the wake of comments from US Secretary of State Pompeo who warned that the US will hold China and Russia accountable if they attempt to block sanctions snapback on Iran. Separate reports have noted that US and Chinese trade negotiators plan to confer by video in the coming days over Phase One progress, however, no date has been set yet and expectations for the call, should it take place, will likely be relatively low. In terms of the tone of the market in Europe, all sectors trade in the red, with some of the more defensive sectors such as health care and utilities faring slightly better than peers, but ultimately still lower on the day. Basic resources are a laggard in the region following recent declines in both precious and base metals and post-Antofagasta (-4.8%) earnings with the Co. reporting a 22.4% decline in H1 core earnings amid the COVID-19 crisis; note, the Co. will nonetheless pay an interim dividend. Somewhat of a divergence has been seen in the travel & leisure sector with airlines such as IAG (-4.8%), Ryanair (-3.1%) and easyJet (-2.3%) lower as the UK is set to further expand its list of countries which will force travelers to self-isolate upon return. Conversely, hotel names are faring slightly better with Accor (+0.7%) and InterContinental Hotels (+1.0%) supported by reports in French media suggesting that the former could put in a bid for the latter. Elsewhere, as part of a more anti-cyclical bias, banks and auto names are faring relatively poorly this morning, for banks-specifically, some of the laggards are predominantly Spanish names, which could be a reflection of mounting COVID-19 cases in the nation.

Top European News

  • Schaeffler Looks to Raise $1.5 Billion Amid Pandemic Fallout
  • Swedish Match Misrepresented Oral Nicotine, Lawmakers Say
  • Macron Rules Out Shutdown as Europe Grapples With Virus Upsurge
  • Adyen Clinches Wirecard Clients During Online Shopping Boom

In FX, the DXY index oscillates on either side of 93.000 in the aftermath of the FOMC minutes - which pushed back on expectations that further policy action will arrive soon as it indicated that members are not inclined to a forward guidance change and YCC. The release propped up the broader Dollar and index back above the 93.000 mark to a high (yesterday) at 93.059, but thereafter trickled back below the figure as the dust settled in early European hours. The index has since regained traction and printed a fresh intraday peak just under 93.200. with the 21 DMA in proximity at 93.336. US stimulus talks will likely regain focus alongside US-Sino developments, whilst US Philly Fed and the weekly initial and continuing jobless claims, and Fed non-voter Daly are on today’s docket.

  • AUD, NZD, CAD, GBP, EUR - All softer against the Buck to various degrees, with the non-US Dollars taking their cue from the subdued risk tone across the market, with the antipodeans bearing the brunt of the pressure. AUD/USD remains sub-0.7200 having had dipped below its 21 DMA (0.7165) in early European trade, whilst the NZD/USD meanders around its 50 DMA (0.6550) after side-lining comments from RBNZ Assistant Governor Hawkesby whose speech largely proved to be a rehash of recent communication. The Loonie also see modest weakness, albeit fares better than its antipodean counterparts, with USD/CAD matching Tuesday’s high around 1.3231 but remaining contained within a tight band ahead of BoC Deputy Governor Beaudry’s panel discussion later today.  The core European FX trade in tandem with the Dollar. EUR/USD is edging closer towards 1.1800 to the downside from 1.1868 at best ahead of its 21 DMA at 1.1789 as trades eye the release of the ECB Minutes (Full preview available in the Research Suite). EUR/GBP resides around its 50 DMA (0.9034) having had printed a current parameter of 0.9030-69. Note: EUR/USD sees several large option expiries for today’s NY cut, including EUR 833mln at 1.1800, EUR 2.2bln between 1.1840-50 and 1.4bln at 1.1900.
  • NOK, SEK - The Norwegian Crown saw little immediate reaction upon the release of the Norges Bank decision, which kept rates unchanged and reiterated forward guidance as expected with focus turning to the September update for a possible tweak to the repo path. The NOK however is weaker on the day but more so a function of the risk tone across the market, with EUR/NOK closer to the top of its current parameter 10.5380-5940, albeit faring better than its Swedish counterpart which sees more pronounced losses despite the Swedish unemployment rate printing below forecasts. EUR/SEK continues gaining above 10.3000 with a current high of 10.3380.
  • CHF, JPY - Both modestly firmer against the USD as the risk averse tone persists during early EU hours, with EUR/CHF straddling around the 1.0800 (vs. 1.0842 at best) mark whilst USD/JPY encounters a barrier at 106.00 to the downside from a high of 106.21.
  • EM - EM FX conforms to the overall risk tone with broad-based losses seen across most pairs. USD/TRY gears up for the CBRT’s rate decision where no change is expected to the One-Week Repo rate amid a number of “backdoor” policy tightening measures taken up by the bank to stem the Lira’s freefall, although some have flagged the possibly of hikes to its overnight lending rate alongside its late liquidity window, currently at 9.75% and 11.25% respectively. Meanwhile, the CNH remains resilient to broader USD action after the PBoC left its LPR setting unchanged, whilst Chinese press noted that  the likelihood of the PBoC lowering RRR this year has declined, with the central bank expected to inject liquidity through reverse repos and MLF.
  • RBNZ Assistant Governor Hawkesby said the balance sheet will continue to expand as it supports the economy while the size and composition of the balance sheet will become a more active instrument for monetary policy decisions. Furthermore, Hawkesby added that it is not necessarily the case that the central bank's balance sheets should revert to their former levels  and reiterated the view that a lower or negative OCR, funding for lending programme, foreign asset purchases and interest rate swaps remain possible options. (Newswires)

In commodities, WTI and Brent October futures hold onto modest losses in the aftermath of the FOMC-induced USD strength and the fallout of the JMMC meeting – which in a nutshell reaffirmed the commitments to the OPEC+ deal, made no recommendations for changes to the output target and emphasised the importance of compliance; laggards set to submit their over-compliance plans to the JMMC by August 28th. Note, Argus media citing delegates stated that OPEC+ needs a cumulative 2.3bln BPD of cuts over the next two months to make up for the stragglers’ shortfalls, albeit journalists with access to the ministers’ memo of the meeting say there is no such mention. WTI October meanders around USD 42.75/bbl (vs. high 42.98/bbl) while its Brent counterpart trades on either side of USD 45/bbl (vs. high 45.18/bbl). Elsewhere, spot gold and silver remain impaired by post-FOMC losses sub-USD 1950/oz and below USD 28/oz respectively as a firmer Dollar persists, having had traded within a USD 25/oz intraday range thus far. In terms of base metals, LME copper prices remain subdued by the Dollar and as the red metals track the equity sell-off, whilst Dalian iron ore futures ended the overnight session lower by over 1% against the same backdrop.

US Event Calendar

  • 8:30am: Philadelphia Fed Business Outlook, est. 20.8, prior 24.1
  • 8:30am: Initial Jobless Claims, est. 920,000, prior 963,000; Continuing Claims, est. 15m, prior 15.5m
  • 9:45am: Bloomberg Economic Expectations, prior 38.5; Bloomberg Consumer Comfort, prior 43.7
  • 10am: Leading Index, est. 1.1%, prior 2.0%

DB's Craid Nicol concludes the overnight wrap

The repetitiveness of virus, fiscal and geopolitical headlines was finally put to one side yesterday with last night’s FOMC minutes offering an insight into the latest thinking over at the Fed. The minutes showed a Fed that aimed to wrap up its review in the ‘near future’ - most likely at the September meeting - though did not see a massive urgency to provide additional monetary accommodation. Neither were there any clues about imminent changes in either the size of composition of QE. The minutes also showed that officials were unenthusiastic about yield curve control, with our economists continuing to expect the Fed to move towards average inflation targeting. See our US economists’ full recap on the minutes here.

The minutes had enough in them to see equities make a decent U-turn. By the close of play the S&P 500 finished -0.44%, falling -0.71% in the last two hours of the session after the release. The NASDAQ also lost -0.57%, however not before Apple’s market cap had briefly passed the $2tn mark for the first time ever – the first US company to do so. Keep in mind that Apple’s market cap dipped below $1tn on March 23rd. So that works out to over $6.7bn of value added for every business day since, which is staggering. For context it took four decades for Apple to reach a $1tn market cap in 2018.

The dollar has been moving in a hurry in recent weeks too however yesterday did see a large reversal of some of the recent weakness with the dollar index bouncing back +0.67%. Half the move came after the minutes were released and it’s held onto gains overnight too. As for rates, 10y yields ended the session +1.1bps having traded a touch lower going into in the minutes although they have reversed much of that move overnight. The same goes for the bear steepening which was a big talking point last week, with 2s10s up +1.3bps and 5s30s up +2.4bps yesterday but curves flatter this morning.

This morning in Asia markets are following Wall Street’s lead with the Nikkei (-0.88%), Hang Seng (-2.11%), Shanghai Comp (-1.08%), Kospi (-2.93%) and ASX (-0.91%) all in the red. The move for the Kospi hasn’t been helped by the latest virus data in South Korea, with a reported 288 cases in the past 24 hours. Meanwhile, reports that the US has suspended its extradition treaty with Hong Kong and ended reciprocal tax treatment on shipping also isn’t helping broad sentiment this morning, as is the news that President Trump is calling on the UN to renew all nuclear-related sanctions on Iran. Futures on the S&P 500 are also down -0.64% while spot gold and silver prices are up +1.15% and +1.88% respectively.

Back to yesterday, where some of the focus was on earnings in the US retail sector – notably from Target, Lowe’s and TJX. The former’s shares were the best performing in the S&P, jumping +12.65% after reporting both record profit and sales last quarter. Lowe’s share price was up a much more modest +0.30%. Even though the home improvement store beat sales growth expectations, the stock was dragged lower with the overall index over the course of the day. TJX was down -5.33% after announcing that they expect sales this quarter will fall over -20%, as the business model is more geared to in-store purchases rather than online.

In other news, White House Chief of Staff Mark Meadows said yesterday on fiscal discussions that “the outlook for a skinny deal is better than it’s ever been, and we’re still not there”. That followed the comments from Pelosi who suggested there could be a meet in the middle near term solution and a Bloomberg story which suggested that the Trump administration sees a possibility for the two sides to agree on a pared-down $500bn deal that would omit the biggest areas of disappointment for now. The question remains whether the market would see this as enough and whether it would be enough to filter through the economy and into late summer/early fall economic data.

Meanwhile, in emerging markets the Turkish lira rallied after reports yesterday that the country had made an energy discovery in the Black Sea, which was most likely natural gas. We don’t have the full details yet, but the market reaction was notable, with the currency strengthening by +1.17% against the US dollar. Other Turkish assets similarly rallied, with the country’s BIST 100 equity index up +2.95%. Turkey is likely to be in the headlines again today with a monetary policy decision expected later. Our economists are anticipating a hike in the 1w repo rate to an above-consensus 10.0%.

As for the rest of markets yesterday, in Europe the STOXX 600 closed up +0.65% while European banks rallied +2.04%. That was despite bond markets in Europe closing down 1-2bps. In commodities Gold ended -3.67% lower as the dollar rallied, while WTI oil was -0.23%. Finally, in credit markets both HY and IG spreads were little changed in both the US and Europe. On that note, this week we published a report titled “Is duration risk the new credit risk in IG”, specifically looking at the impact of a pick-up in long dated issuance in the US IG market and the subsequent shift that has had in terms of spread duration. See the full note here.

Wrapping things up, in terms of data yesterday, there was a big upward surprise in the UK’s CPI reading, which came in at +1.0% in July (vs. +0.6% expected), whilst core CPI also surprised to the upside at +1.8%. It was the reverse picture in Canada however, where July’s CPI fell to +0.1% (vs. +0.5% expected). Finally, we also had the World Trade Organization’s Goods Trade Barometer, which fell to its lowest since data began back in 2007 at 84.5, below the baseline value of 100 and -18.6 points lower than at the same point a year ago.

To the day ahead now, and there are a number of data highlights from the US, including the weekly initial jobless claims, the leading index for July, as well as August’s Philadelphia Fed business outlook. Over in Europe, we’ll get the latest ECB minutes from their July meeting, as well as the German PPI reading for July. On the central bank front, there’s also a monetary policy decision from the Central Bank of Turkey, as well as remarks from San Francisco Fed President Daly. Finally, the Democratic convention will wrap up tonight, with their presidential candidate Joe Biden due to speak.

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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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