Conflict in Ukraine
This morning’s headlines feature Russia’s continuing bombardment of civilian areas in Ukraine juxtaposed against a statement from President Zelensky that peace talks ‘sound more realistic’. This follows Zelensky delivering an address to the nation, ‘conceding’ that Ukraine will not be able to join Nato – which has been a demand of Russia’s from day one. One of Ukraine’s top negotiators, Mykhailo Podolyak stated that while “fundamental contradictions” persist between Moscow and Kyiv there was nonetheless the prospect of “room for compromise”. Sentiments from Putin appear less optimistic however, with the Russian President stating that Kyiv was not serious about finding a mutually acceptable solution. Yesterday, Russia also quit the Council of Europe which seeks to uphold human rights, democracy, and the rule of law across the continent in a move which casts questions on whether Russia is increasingly becoming a pariah state.
Thus far the Russian military campaign in Ukraine has been subject to a plethora of difficulties, not least the mud caused by Ukraine’s thaw. In Russia, the current climatic conditions give way to the phrase ‘rasputitsa’ which roughly translates to “a time of year when dirt roads are difficult to traverse”. Subsequently, Russian material including armoured personnel carriers and troop carriers are increasingly getting bogged down in the mud. This is problematic for them given that attempts to reduce spending on the Russian Army have included buying cheap tires which are bursting when efforts are made to release them from the mud. This problem may only get worse in the coming weeks as the mercury moves firmly above zero – whether this is a good thing for Ukraine because it allows them to counterattack, or a bad thing because it may lead Putin to use ‘non-conventional’ weapons is entirely unclear.
Following Western sanctions and Fitch’s downgrading of Russian sovereign debt to junk status, the prospect of Russia defaulting is becoming highly likely. Today the Russian government are due to pay some $120m in USD denominated debt which will be challenging given their effective inability to access those dollars. While the Kremlin’s Minister of Finance, Anton Siluanov earlier this week floated the possibility of paying USD denominated debt back in Rubles, a move which their creditors would be unlikely to accept. Failure from Russia to repay their creditors will see the country enter a technical default while failure to repay after their 30-day grace period will see them enter an actual default. More generally Russia has just over a dozen international bonds outstanding totalling around $40 billion with around half of these are held by international investors, which means even if they make the payment today, the issue will persist.
Fed Rate Hike
Elsewhere, the Fed are expected to announce a 25bpt rate hike to 0.5% this evening. Such a move has already been priced into the market with the general market consensus being that the Fed are expected to continue on course with around five further hikes this year, which would take rates to 1.5% by December. The Fed continue to find themselves in a precarious balancing act, exacerbated by the recent developments over the conflict in Ukraine. Namely, headline inflation in the US stood at a 7.9% in February as the rising cost of energy and food helped push CPI figures to their highest level in 41 years with most forecasts expecting this level to continue climbing. While this figure remains around four times higher than the Fed’s target rate of 2% – the Fed’s appetite to raise rates are severely hindered by the desire not to dampen growth. Indeed, a recent survey conducted by CNBC which considers the attitudes of fund managers and economists, suggested that there is a 33% chance of a recession over the next 12months. It is also worth noting that this is up ten percentage points from the same survey on 1st February.
China in Lockdown
China is back into largescale lockdowns and with those come the prospect of hits to supply chains and logistical challenges. Covid cases in China were reported at 3,507 yesterday which, quite amazingly, is the highest reported number in two years. Lockdowns are potentially going to be a shorter affair than in 2020 and they could be lifted in certain areas by Sunday, which would be a massive help as the relatively short duration would be manageable. It’s difficult to see how China will be able to come out of its current covid modus operandi, with a vaccine that wasn’t particularly effective in the first place and not much in the way of community transmission and herd immunity. The country is working through a booster programme with a modified vaccine and hopefully that puts them in better stead, but for now we’re expecting more of the same behaviours over coming months, which will become a particular problem if it’s still happening at the halfway point of the year because then it will be impacting Christmas trade (first time we’ve mentioned Christmas quite this early in the year!)
Have a great day.