The Macro Muse — Stakes in Ukraine (Jan 2022)
Russia — Ukraine tensions
Russia-Ukraine geopolitical tensions was in focus in global markets this week, with Western powers doubling down on Russia on consequences if military actions were taken. Top officials from UK, US, and France held calls with Putin, reflecting high economic and geopolitical stakes.
On the economics side of the formula, the conflict has led to heightened commodity and energy prices, with European neighbors bearing the pain in natural gas, metal, and wheat prices. Piped gas from Russia makes of 1/3 of gas burned in Europe. Immediate disruption will be felt most acutely in Slovakia, Austria, Italy, and Germany. Germany is especially vulnerable, as it shut nuclear plants and continues to retire coal power stations, remaining the most reliant on natural gas. It is Europe’s largest consumer of gas (1/4 of EU’s total energy consumption), with Russia (Gazprom) supplying over half of its gas imports.
Yet, multiple factors support Europe’s energy resilience, including: (1) Pro competition clauses — thus creating a dense interconnecting web of gas pipes across countries. (2) Supply of LNGs, with many running at < 50% capacity. (3) Chinese SOEs, eying soaring EU energy prices, are also looking to ship LNG gasses to Europe.
In the attempt to halt Ukraine’s Westward drift (e.g. joining the NATO), Putin faces high stakes. Consequences will include (1) Human casualties — not only military but also Russian citizens whom many have family ties in Ukraine, (2) Economic consequences — Russian banks will be penalized, the ultra-rich might be prevented from foreign investment and savings; Gazprom’s commercial fallout would be more difficulty to secure long term EU contracts in the future, and (3) Geopolitical backlashes from European and Western neighbors.
Inflation concerns and global supply chain pressures
In this Wednesday’s FOMC meeting, Powell said (1) the FED is ready to raise rates in March (Money markets now expect almost 5 hikes from FED, and 4 from BOE in 2022), (2) FED will stick to schedule of ending bond purchases in March, (3) Didn’t give hints on when the $8.9T balance sheet reductions will begin; while warning the risk of prolonged heightened inflation — as supply chain concerns dominate.
Supply chain concerns are manifested with US company’s earnings reports and top official’s statements. Biden has warned semiconductor shortage (esp for auto, medical device manufacturers) will persist, at least until 2H22. Such supply chain bottlenecks will likely drive inflation and chip prices in the near term. Tesla and Intel slipped after earnings reports raised concerns over supply constraints and higher costs. While Tesla Q1 mass-market sales continue to be strong; it warned production may be limited in 2022. Since Biden took office, officials have raised the issue of chip controls in diplomatic agendas. Governments and companies have set up forums in chip trade, equipment manufacturing, and material used — with US aiming to contain China’s chip ambitions.
China Real Estate — state owned firms stepping up influence in property markets
In China, SOEs and LGFVs have taken a step further in expanding influence in the real estate industry. According to consultant China Index holdings, LGFVs have become China’s biggest buyers of land. SOE developers have snapped up market share (+>5%) from POE developers (->5%) since 2021, while support in forms of investments, taking stake or restructuring CRE developers with help from SOEs have taken stage. For instance, (1) State owned Cinda AMC (CCAMCL) chairman Liang was appointed executive director of Evergrande (EVERRE) on Jan 2022, a signal that Evergrande is close to securing investment from Cinda. (2) Shimao group (SHIMAO) sold a 26.67% stake in one of its projects to China Overseas Land (COLI), also an affiliate of a Chinese SOE. (3) SOEs are bidding for Kaisa Group’s projects in Shenzhen (according to China Business News). Yet the increasing purchases of land from LGFVs also exacerbates systemic risks , as they are the second biggest non-financial borrowers offshore and the largest onshore.
