HC-AM Morning Report - Tuesday Morning Update

Good Morning,

Here are this morning's headlines:

Inflation-With prices rising across the board, Goldman Sachs have increased the pace at which they see the Federal Reserve raising rates. The bank predicts the FOMC will hike by 0.5% at each of the next two meetings and then 0.25% at each of the remaining four meetings in 2022 thereafter. If they do this then base rates in the US will be 2.5% by Christmas, a ten-fold increase from Christmas 2021. The Fed have been openly hawkish in their comments, preparing the markets for rate rises, but with only the one tool in their arsenal to try and combat the spiralling cost of living – and the long delay in monetary policy being decided and its effect being felt in the real world – there’s probably a good degree of crossing fingers and hoping for the best. The market sees a risk here that the Fed might go too far with their interest rate agenda and could inadvertently stall the economy and as such the reaction in bond markets is that the difference in yield between 10 year and the two-year bonds is shrinking towards zero. The fear now is that this yield curve ‘inverts’, which it certainly looks as though it is on the way to doing, and such an outcome has previously predicted ten of the last 13 recessions. This is by no means a done deal though and even if it does invert then there are people arguing that this phenomenon is less relevant in the age of quantitative easing than it was when ‘traditional’ monetary policy was a thing.?The FT has a deep dive into this if you like the technical side of things.

Iran- Energy is the overwhelming contributor to inflation and securing supplies of fossil fuels is leading to the US becoming ready to make ‘difficult decisions’ about its position on Iran. The US State department isn’t willing to go into specifics on the negotiations, but Iran is holding out for guarantees that another incoming Us administration can’t just withdraw from the deal, like they did under Trump, as well as the removing the designation of ‘terror group’ on Iran’s Revolutionary Guards. The State department have also refused to be drawn on whether a deal is likely and are in fact “preparing equally for scenarios with and without a mutual return to full implementation of the JCPOA” – this sounds like it’s close to being signed to us.

Ukraine- In Ukraine: President Zelensky said on TV last night that he is ready to discuss a ceasefire with Putin on the basis that Ukraine don’t seek Nato membership in return for an immediate ceasefire, withdrawal of Russian troops and a guarantee of Ukraine’s security. He also said that his administration would be willing to discuss the status of Crimea and the astern Donbas region after a ceasefire is agreed and certain guarantees are in place, but that they will also have to be put to a referendum in Ukraine.

China & Russia- Thirty years ago, the economies of China and Russia were roughly the same size, now the former is ten times the size of the latter. While Russia has been an example of the growth witnessed by BRIC economies over the last couple of decades, even prior to the latest tranche of international sanctions its economy had been struggling. For example, given Russia’s financial crisis in 2014 - in addition to sanctions following their annexation of Crimea in 2014 and the collapse in oil prices in 2015 – Moscow fell into a large recession with GDP falling by 2.8% in 2015. In contrast, in 2015 China’s economy grew 7% and continues on an upward trajectory of growth. It’s no revelation that as economic difficulties mount, autocratic leaders will sometimes undergo military adventurism in an attempt to rejuvenate sentiments of nationalistic chauvinism. This was seen in 1982 when Gualtieri invaded the Falklands after years of economic troubles. However, given that Putin has seemed to vastly underestimate his military campaign, questions are being raised about whether his intentions have massively backfired.?Indeed, the Russian Newspaper, Komsomolskaya Pravda wrote yesterday that 10,000 Russian soldiers had been killed in the conflict thus far. To put this into context, over the ten years that the Soviet Union were in Afghanistan, Moscow had some 9,500 troops killed in action and around 14,400 killed overall. As these figures continue to mount there are growing questions about how it will affect the Russian’s public perception of the war – and in turn their perception of Moscow and Putin.

Water- Today marks the United Nations World Water Day. Around the globe two billion people are currently living in water stressed countries and given that global water usage has increased by one per cent each year, it is predicted that intense water scarcity could displace seven hundred million people by 2030. It goes without saying that water is the bedrock to life and the world’s economies and as the pressures on the world’s water supplies continue to mount, so too will geopolitical tensions. For example, its estimated that there are around 600 trans-boundary aquifers and 286 shared river basins around the globe and as Klaus Dodd wrote in a recent book, ‘the norm around the world is weak or non-existent water-management plans in place’. Moreover, as states invest in renewable energy sources such as hydroelectricity, countries which lie downstream infrastructure projects such as dams are getting increasingly concerned about their water security and the prospect of water scarcity.?Indeed, just last month Ethiopia began generating electricity from Grand Ethiopian Renaissance Dam (GERD) which stands on the Blue Nile. Considering that the Blue Nile supplies around 85% of the water that flows into the Egyptian Nile, Cairo is worried about the leverage that the dam gives Addis Abeba. For instance, it is estimated that a 10% reduction in supply of Egypt’s water could result in 5m within the agricultural sector being made redundant and diminish agricultural output by a half. Other pinch points include management of the river Mekong, the Al-Disi aquifer and Lake Turkama and hence World Water Day is a reminder of the ongoing and foreseeable challenges facing the words most valuable resource.?

Looking Ahead- Today, while primary economic data is a little light on the ground all eyes will be on Christine Lagarde’s speech at 13:15. Tomorrow, the UK will be focusing on the Chancellor’s Spring Statement and CPI figures released at 07:00 where the market is expecting to see headline inflation hit 5.9% - a significant rise from January’s print of 5.5%.

Have a great day.

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