“Risk” Is On: Food, Energy, Goods And Finance Are All Being Used As A Weapon

By Michael Every of Rabobank

“Risk” is on. I don’t mean market risk: not when Western stocks are slumping after yet another head-fake rally, the Nasdaq now in a bear market again; not when Chinese stocks are experiencing a 2008-style collapse – and who knew geopolitics and ideology still mattered in a highly geopolitical, openly Leninist political-economy?; not when oil prices are down 35% from their recent high; and not when US Treasury yields are surging, and the 5s-10s curve is close to inverting even before the Fed meeting this week. No, that is all very much risk off, even as some will cling to the hope that China slashing banks’ reserve requirement ratios and rates, even as the Fed hikes, and despite its surprise failure to cut 10bp to 2.75% today as expected, is good news.

What I mean that the boardgame “Risk” is on, which I used as a visual analogy of where geoeconomics would end up once neoliberal free trade failed in 2017’s ‘The Great Game of Global Trade’. To say it was not a popular call at the time is an understatement: but here we are.

Yesterday’s key meeting between the US and China in Rome obviously did not go well. Pre-meeting, I was informed the article doing the rounds from a Chinese academic saying Beijing should dump Russia for the West was banned from circulation in China. The official US read-out was bare bones, which is the diplomatic practice when there is nothing positive to say. Worse, US intelligence has told allies that Russia asked China for surface-to-air missiles, drones, armoured vehicles, logistics vehicles, and intelligence-related equipment – and that China responded positively.

Naturally, the implications are enormous – the White House says there will be “consequences” for China if this occurs and the State Department that “we will ensure that no country is able to get away with trying to bail out Russia”. A D.C.-based analyst also Tweets to underline: “The view from Washington is unanimous: a decision by China to aid Russia’s war in Ukraine would be a betrayal of its commitment to act as a responsible great power and would severely and irrevocably damage what remains of the US-China relationship. There is no doubt that China would share in the unprecedented economic and political pain that Russia now suffers as a pariah state. Much of the favour Beijing has had cultivated in Europe over the past 30 years would evaporate overnight.”

Those are the stakes in this game of “Risk” – China as the next Russia. And yet speaking from conversations with markets here in Asia, there are still buy-side(!), not sell-side, Street analysts not allowed to even mention the word “war” in regard to Ukraine or Russia, or to allude to anything that is going on globally except in the vaguest of possible terms, such as “geopolitics”… as if that word carries all the required explanatory and/or predictive power in isolation.

For them, in the game of “Risk”, you capture territory to increase your resources to increase your global power. That is underway in Ukraine, although Russian military expert Michael Kofman points out Russia seems increasingly set on destroying Ukraine economically with its latest bombing as part of its “demilitarisation” plan. If so, it looks a repeat of the post-WW2 Morgenthau plan to turn Germany back into a nation of peasant farmers. And in the real world you can also use resources to ‘capture’ territory economically and politically:

In food, yesterday Argentina banned soy and soy oil exports; agri giant Bayer announced it would cease vital exports to Russia, as “Crop supplies are contingent on peace.”; and Russia said it may halt exports of wheat, barley, corn, and rye until 30 June, with exceptions for friends, as there are with its and Belarus’s fertilizer export ban. **FOOD IS BEING USED AS A WEAPON**

In energy, nobody believes prices are going to stay low for long even as they slumped yesterday. India is proposing rupee trade with Russia to buy its oil at a discount. Many voices say this is the end of the US dollar as global hegemon. Most of those looked at the size of the two countries on the map and not at Russia-India trade of just $2.6 billion. Yes, oil, fertilizers, and weapons are key categories in “Risk”, but this is a rounding error for the global Eurodollar… even if it is a potential geopolitical error for a White House with little such ‘game’. On which, the US officially backed away from talking to Venezuela to get its oil – but US energy firms suggest they are open to debt for oil swaps with it. The US says the Iran nuclear deal is at an impasse, and it is looking for “diplomatic alternatives” to prevent Tehran from obtaining a nuclear weapon – as Saudi Arabia invites Xi Jinping to visit in May, showing its diplomatic alternative. **ENERGY IS BEING USED AS A WEAPON**

In manufactured goods, China locked down Shenzhen, with other provinces feared to be next. Foxconn has already shuttered key tech goods production: so, Covid shortages are back – and Hong Kong data point to how rampant Covid is proving vs. Chinese vaccines. Some wonder darkly if this was also a signal to the US – force decoupling with China (e.g., driving the collapse in Chinese tech stocks), and see your supply of goods interrupted. Yet if so, it’s the same threat as from Russia – and nothing makes a better case for decoupling, as we see with Russia. **GOODS ARE BEING USED AS A WEAPON(?)**

For the past two years, China had at most 50-100 new daily covid cases. Now it’s 5000, and it is shutting down key supply chain arteries that feed the US economy.

So bizarre

— zerohedge (@zerohedge) March 15, 2022

In logistics, Ukraine is pushing for Russian ships to be banned from global ports; many ocean carriers won’t go to Russia or unload Russian cargo; and foreign ships may be banned from Russian ports. Vladivostok is now unserved by international airlines, leaving it only reachable by train or car – while imported parts last for the latter: my Russian friend reports everyone now fears their vehicle being stripped on the street. Western (and Japanese and South Korean) airlines flying to/from Europe to Far Eastern destinations can no longer fly over Russia, adding hours to the journey time and hugely to the cost: Paris – Beijing could now take up to 6.5 hours extra! And just imagine if China were also to close its airspace too. **LOGISTICS ARE BEING USED AS A WEAPON**

In the economy/finance, I have to correct myself, in that yesterday I stated it would cross a Rubicon for the West to appropriate Russia’s FX reserves and give them to Ukraine: I forgot the US already did just that with Afghanistan’s FX reserves, which it froze half of while donating the other half to 9/11 charities, leaving millions of Afghans to risk starvation as food prices soar. On Russia, CNBC Twitter cites a Deputy US Treasury Secretary stating further sanctions options on the table include a full trade embargo and blockading access to international waterways(!) – which would require the US Navy and be taken as an act of war by Russia; and bans on nickel, uranium, and titanium exports – just as the LME reopens with new 15% daily limits on metal price movements. (Play nicely, children, and remember not to short squeeze Chinese giants because it’s not allowed.) The blockade idea is worth remembering – and Beijing will certainly do so given how much it relies on maritime imports of food and energy, and exports of its goods. **THE ECONOMY/FINANCE IS BEING USED AS A WEAPON**

In La-La-Land, Elon Musk has challenged Putin to single combat with Ukraine as the prize. And Russia’s Sputnik News says Zelenskiy says peace could be established by May. So ignore all of the above and go risk on – which the market no doubt will try to today. **HUMOUR AND PROPAGANDA ARE BEING USED AS WEAPONS**

I have to confess that I played “Risk” endlessly when younger, and I sadly specialised in rolling 2s and 1s, not 5s and 6s, hearing my fellow players yell, “Break it up, shmendrick!” Those in markets who don’t see we are playing that game today will be the broken-up shmendricks. Until a global winner emerges, massive daily volatility looms. Commodity prices will more likely saw-tooth higher than lower. Bond yields will saw-tooth higher/flatter in response until central banks break markets with theirs. FX will saw-tooth all over the place: and watch CNY, which just had another daily fix set 100 pips weaker than market expectations, while CNH has moved from 6.31 to 6.41 since 23 February – imagine where geopolitics could take it yet.

Let’s conclude to note the RBA minutes today showed the bank noticing Ukraine, and flagging “a major new source of uncertainty”. Quite. Now back to reading ‘Domain’ for them.

And China saw a slew of strong key numbers, with industrial production 7.5% y/y vs. 9.6% in January and 4.0% expected, fixed asset investment 12.2% y/y vs. 4.9% and 5.0% expected, retail sales 6.7% y/y vs. 12.5% and 3.0% expected, and property investment 3.7% y/y vs. 4.4% and -7.0% expected. So, despite lockdowns, and the early Ukraine war backdrop, and what were already slumping stock markets last month, and a weak housing market, and fears of Fed hikes, and the on-the-ground China Beige Book guys seeing no sign of real strength, China is baaaaaack! Time for them to raise rates then, right? Riiiight… This is the same China not seeing any CPI inflation as the rest of the world is ravaged by it. **DATA ARE BEING USED AS A WEAPON, HUMOUR, OR PROPAGANDA**

Have a good day – and don’t roll a 2 and a 1. China clearly makes its own dice, so doesn’t need to worry.