Letter From Shanghai No 841 - Misplaced Hopes

To recap, European and US stock markets closed lower overnight, and a variety of commodities driven by supply concerns have risen sharply. WTI has lifted from $95 yesterday to $108, as I write. Perhaps for the first time, we are seeing a conflict that contains both physical and economic hostilities. Russia is cut off from a large part of its foreign reserves and the USD RUB has significantly diverged between its onshore and offshore price as Russian financial institutions cannot engage in the international market, therefore market participants are concerned whether rouble forward contracts will be delivered. Depending on where you look, the rouble is trading between 108 and 111. In equities, the Stoxx stock index has confirmed it will remove all Russian constituent companies, and the MSCI is considering the same policy. In reply, the Russian government has allocated 1 trillion roubles to buy the stocks of sanctioned companies. The Russian and Ukrainian delegations will meet again later today on the Belarus-Polish border.

Elsewhere, although the HK official Covid infection rate is running at over 30,000 per day, modelling from the University of Hong Kong suggests 1.7m are already infected. Although we have seen elsewhere all models are wrong but sometimes useful, it would suggest the planned citywide containment lockdown is already redundant and that the city should focus on those that are seriously ill. Indeed, extrapolating the current HK death rate on US terms, it is running at 7000 per day, whereas in its darkest days, the US rate was only 4000 per day. Unsurprisingly, 14,000 people left HK in January and 65,000 left in February, and arguably it could be more if there were sufficient planes.

The official Chinese manufacturing and non-manufacturing PMI were published yesterday, showing modest improvements sufficient to suggest the Chinese economy has moved from stasis to marginal expansion. Enough perhaps to avert any type of Chinese QE, but also small enough to continue to pursue its policy of targeted fiscal relief. However, China and, for that matter, Asia’s hopes that inflation driven by supply chain disruptions would ease throughout 2022 are likely to be misplaced.

John