Tuesday 15/03/22

  1. In MACRO, MARKETS & ENERGY NEWS, we look at US/China/Russia thoughts, the effect on markets and how energy policies are having to adapt
  2. In ACTIONS & CONSEQUENCES, Bayer considers cutting off crop supplies to Russia and Germany orders US fighter jets while Russia edges closer to default, aircraft leasing gets trickier and Akzo Nobel faces Russian shutdown
  3. In CONSUMER NEWS, potato prices are set to rise, Uber hikes its prices but travel restrictions are lifted, super-rich have a super-fun time and the UK inflation basket evolves
  4. AND FINALLY, it’s Pomplamoose time…

1

MACRO, MARKETS & ENERGY NEWS

So the drama continues, markets wobble and energy changes are being made…

The crisis in Ukraine is beyond words. Many stories that we see now of tragedy, sacrifice and loss make everything else pale into insignificance. However, I will continue to bring you news on this and everything else in the business and financial markets news because it may well have repercussions that have major consequences for us all and that we still need to understand better.

In US tells allies China signalled openness to providing Russia with military support (Financial Times, Demetri Sevastopulo) we see that the Americans are suggesting that China has been considering requests from Russia for equipment including surface-to-air missiles, drones, intelligence-related equipment, armoured vehicles and other support vehicles to bolster its invasion of Ukraine, although they weren’t very specific about when this request was made. Obviously China has denied this and although Beijing is likely to say ‘nyet’ to Putin’s pleas for help (Daily Telegraph, Ben Wright) goes against this, it is worth reading if you can because it makes some very interesting points. Firstly, it highlighted who Russia’s friends are – on the UN Security Council vote on the resolution deploring Russia’s invasion, out of 141 members, Belarus, North Korea, Eritrea and Syria voted with Russia and another 35 abstained, including China, India and Iran. Secondly, it says that Russia is already facing funding issues that are only going to get worse the longer the war drags on and that China will be the only place for it to turn to. If China helps Russia financially, then the world will have to slap sanctions on China as well, and that won’t go well at all given that China’s economy is ten times bigger than Russia’s – so ostracising China will be far more painful. Thirdly, the way in which the world reacted to the invasion may mean that China, Russia and other countries will withdraw into themselves more in future in order to minimise the sort of economic damage we are seeing in any future conflicts (like Taiwan, for instance). * SO WHAT? * As things stand at the moment, consensus seems to be building that China will gain more from being a peacekeeper by bringing both sides together than it would from siding with the aggressor, but it still hasn’t really done anything to ease the situation. In the meantime, Ukraine economy could shrink by up to 35% this year (The Guardian, Larry Elliott) cites the initial assessment by the IMF of the economic impact this war will have.

In markets, China stocks drop for 2nd day as Covid-19 outbreak grows (Financial Times, Hudson Lockett) shows that shares in China and Hong Kong continued to fall on rising cases of Covid and speculation that China is willing to help Russia with its invasion efforts but given China locks down Shenzhen as it battles biggest Covid surge since start of pandemic (Financial Times, Ryan McMorrow, Primrose Riordan, Gloria Li and Kathrin Hille), it looks like things could still get worse as its tech hub is getting the full lockdown treatment along with other cities. Also, Hong Kong’s brain drain in reaction to increasingly draconian rules on Covid isn’t going to help either. It’s not going great for Russian companies either in Evraz is among Russian companies expelled from FTSE indexes (Daily Telegraph, Simon Foy) as the Russian miner part-owned by Roman Abramovich is being ejected from the London Stock Exchange along with Polymetal (another miner), Petropavlosk (gold miner) and Raven Property (small-cap investment company with a Russia focus) after brokers refused to handle share trading in the companies.

In energy news, US retreats on Venezuela oil talks after Maduro meeting criticism (Financial Times, Gideon Long and Michael Stott) shows that getting oil from Venezuela as an alternative to Russia is a no-go after a massive backlash following the leak of its “secret” meeting with President Maduro recently. Instead, America fires starting gun on new gold rush in shale (The Times, Callum Jones) shows that America is on the verge of another shale boom with the likes of ConocoPhillips, Chesapeake Energy and Continental Resources all likely to benefit – their respective share prices have already risen by between a third and a fifth since the start of this year in anticipation. In the UK, Last chance to save fracking before wells are capped, warns Cuadrilla (Daily Telegraph, Rachel Millard and Matt Oliver) shows that the company most-associated with fracking in the UK, Cuadrilla, is turning the screws on the government to approve fracking and UK looking to extend life of nuclear plant by 20 years amid energy crisis (Financial Times, Jim Pickard and Nathalie Thomas) shows that desperate measures are being considered for the Sizewell B nuclear power plant as plans for a new “energy supply strategy” take shape in the scramble to wean ourselves off Russian oil and gas. There is definitely a sense of urgency in Get ready for £3 diesel and rationing, experts fear (Daily Telegraph, Giulia Bottaro) as analysts at Energy Aspects make some sobering predictions about the prospects for diesel prices. Russia supplies almost 20% of the UK’s diesel versus 8% of oil imports from the country. * SO WHAT? * This will all put pressure on chancellor Rishi Sunak NOT to introduce tax rises planned for April as British consumers have already got enough to deal with.

2

ACTIONS & CONSEQUENCES

Sanctions continue, as do consequences……

In ACTIONS, Bayer threatens to halt crop supplies to Russia over Ukraine invasion (Financial Times, Eva Szalay and Emiko Terazono) shows that the German drug and agrochemical conglomerate, a leading supplier of seed and crop treatments, is threatening to suspend crop supply sales to Russia next year unless it ceases its attacks on Ukraine. This follows recent moves by Cargill to continue operations in Russia but in a scaled-back capacity. Bayer did, however, say that it stood ready to support Ukrainian farmers for this year’s planting season. * SO WHAT? * OK, so Bayer’s Russian business only makes up about 2% of overall group revenue but the implications of companies like Bayer cutting off supplies (or at least restricting them) could have far wider implications for the broader food chain given how important Russian and Ukrainian produce is to world’s food supply.

Elsewhere, Germany to buy F-35 fighters from US in defence spending spree to confront Putin (Daily Telegraph, Giulia Bottaro) is early evidence that Germany is putting its money where its mouth is by putting in an order for 35 F-35 fighter jets just two weeks after Chancellor Olaf Scholz said he’d up his defence spending target considerably. F-35s, which are nuclear-capable, are produced by America’s Lockheed Martin.

In CONSEQUENCES, Russian debt default on the cards after Kremlin issues warning (The Times, Mehreen Khan) shows that Russia is edging closer to defaulting on debt interest worth $117m on two bonds due tomorrow. It is talking about paying in roubles (Russia’s currency has fallen by 40% since sanctions hit), but the conditions don’t allow for that – which would mean that the country would technically be in default. It will have a 30-day grace period to meet its obligations.

Russia law raises stakes for lessors rushing to recover aircraft (Financial Times, Slyvia Pfeifer) highlights the intensifying problems that are facing aircraft lessors who have been trying in vain to collect the planes they have in

Russia. Putin signed a new law yesterday that will allow foreign aircraft leased by its airlines to be added to its domestic register as Bermuda, which is where most of Russia’s commercial jets are registered by the Bermuda Civil Aviation Authority, said it was suspending airworthiness certificates on concerns that they would not be able to guarantee safety given that companies that usually carry out repairs and maintenance have shut up shop in Russia. Dublin-based AerCap, as the world’s biggest leasing group, has the most exposure to Russia. Aircraft-backed bonds hit as lessors try to recover planes from Russia (Financial Times, Joe Rennison) shows the financial angle of the lessors’ problems as many have sold bonds that are backed by plane leases to raise funds. Nothing has happened thus far, but if bondholders get antsy, things could get pretty nasty. * SO WHAT? * Before the sanctions kicked in, there were thought to be 515 planes in Russia, worth a total of $10bn, but that has since dropped to about 450-460 since some have been returned. Aircraft leasing: lessors and insurers weigh up cost of leases on Russian aircraft (Financial Times, Lex) looks at the problem and points out that the grounded planes are going to be fast-depreciating assets, particularly as the lack of safety checks and maintenance will mean that, by some estimates, half of Russia’s fleet will be grounded and cannibalised for parts in order to keep the other half flying. Insurance companies are already starting to cancel parts of policies related to jets leased to Russian airlines particularly as they are currently having to pay out at book value rather than market value (books value is up to 50% higher) and if the planes become officially considered as being requisitioned, they will be more payouts to be made. After limping through Covid, it’s possible that governments will again have to step in and provide financial support once more.

Then in Akzo Nobel expects Russian operations to fold in weeks (Financial Times, Harry Dempsey) we see that Europe’s biggest paint maker (fun fact: it makes Dulux) reckons its business in Russia will collapse in the next few weeks as raw materials get harder to come by and customers become less able to pay by the day (as the rouble continues to fall). The company has four paint plants in Russia that employ about 650 people and their output represents about 2% of the group’s annual revenue.

3

CONSUMER NEWS

Consumers continue to face challenges…

We’re all facing tough times at the moment and the pressure just keeps coming in Fertiliser shortage to push up potato price (Daily Telegraph, Andrew Quinn and Tom Rees) which says we’ll soon be paying 20% more for our potatoes, Uber passengers face 20pc fare rise after VAT ruling (Daily Telegraph, Helen Cahill) shows that Uber is upping fares because it now has to pay VAT following a High Court ruling (black cabs are going to love this!), but on the positive side, UK to scrap remaining Covid travel restrictions (Financial Times, Philip Georgiadis, Alice Hancock and Jim Pickard) shows that we may be able to travel more (if we can afford it after all the other price rises!).

Meanwhile, Super-rich spending splurge after Covid drives Bentley profits (Financial Times, Ben Woods) shows that sales at Bentley rose by a whopping 39% for the year as the super-rich continue to spend and we see in Sports bras and pet accessories added to UK inflation ‘shopping basket’ (Financial Times, Bethan Staton) that the Office for National Statistics is taking into account our changing spending habits by adding 19 products to its 700-item virtual “shopping basket” to keep an accurate track of prices that are used to calculate inflation. * SO WHAT? * Accuracy here is key because we need a real idea of how prices are behaving in order to give the Bank of England the right information to decide the direction of interest rates. Given lockdown, spending habits have changed, so it’s important to reflect that.

4

...AND FINALLY...

…in other news…

It’s a quiet day on the “alternative” news front so, as many of you regular readers of Watson’s Daily know, when this happens I crack open the Pomplamoose 😁. Here is yet another great cover of a classic!

Watson's Daily is a hard-working start-up striving to help people get a better understanding of the business world. I would really appreciate your involvement in spreading the word and recommending it to your friends, colleagues, relatives etc. by clicking and sharing on the links below. Please help me to help you and I will throw in a small thank-you!

Some of today’s market, commodity & currency moves (as at 0757hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
7,193 (+0.53%)32,945.24 (unch)4,173.11 (-0.74%)12,581.22 (-2.04%)13,929 (+2.21%)6,370 (+1.75%)25,330 (+0.09%)3,064 (-4.95%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿
$97.04$100.48$1,928.911.303811.10068117.951.1845138,402.6

(markets with an * are at yesterday’s close, ** are at today’s close)