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On Monday, Ukrainian troops managed to liberate Irpin, a suburb town north of Kyiv. Negotiations to reach a cease-fire agreement resumed on Tuesday in Turkey, after the U.S. Secretary of State Antony Blinken pointed out that neither the U.S. nor NATO are seeking a regime change in Russia, in spite of U.S. President Joe Biden’s weekend remarks about Vladimir Putin in Warsaw. These negotiations were followed by the Russian Ministry of Defence’s commitment to reduce military activities so as to create the necessary conditions for future negotiations.

U.S. Non-farm payrolls released on Friday were 431k, below the median estimate of 492k, while the U.S. Treasury yield curve is reflecting investors’ prediction about a pessimistic economic outlook and, more importantly, their willingness to price in the rate-hiking plan, possibly of more than 25 bps, confirmed even after the Russian invasion by Fed Chair Powell. What’s more, Kansas City Fed’s George said on Wednesday she estimates an interest rate at about 2.5% as a starting point of what the Fed should aim for in upcoming rate hikes.

Yield curve inversions are known to be accurate signals of recession, and this week the 5- to 30-year Treasury spread inverted on Monday for the first time since 2006 and, more importantly, the 2- to 10-year spread inverted after crossing at 2.39% on Tuesday for the first time since 2019. These inversions might be caused by the positive news about cease-fire negotiations, since a diminished geopolitical risk would push the Fed to go on with this hawkish stance more and more neatly. Overall, March 2022 has been the worst month for Treasuries since July 2003, with the Bloomberg U.S. Treasury Aggregate index dropping 3.5%.

Source: Bocconi Students Investment Club

The second-largest crypto theft on record was reported on Tuesday, when almost $615 mln has been stolen from the blockchain project Ronin. Unidentified hackers might have started to work on the data breach from March 23, and they managed to steal 173,600 ether tokens and 25.5 mln USD Coin tokens.

Europe and UK

Flows on the Yamal-Europe pipeline, which delivers ca. 10 bln cubic metres of gas yearly via Poland to the Germany station in Mallnow, stopped between Tuesday afternoon and Wednesday morning, according to the operator Gascade. Germany is heavily reliant on Russian gas supply, with 40% of its imports coming from Russian pipelines, and currently gas reserves are operating only at a 25% capacity. The fear of supply disruption made the TTF futures rise 9% on Tuesday.

For these reasons, on Wednesday the German government, together with the Austrian one, decided to activate the emergency law, which represents a formal step towards gas rationing and will give preferential treatment to households with respect to the industry. This decision was followed by a call between Germany’s Chancellor Olaf Scholz and Russian president Vladimir Putin on Wednesday evening. Apparently, President Putin retreated from his position and hinted that payments by European countries to Gazprombank could continue to be made in euros.

The same compromise was proposed by Putin to Italian PM Draghi as well, who made it clear that the intention of his government is to increase the military budget by €14 bln starting from 2022 in order to permanently reach NATO’s 2% GDP target by 2028.

As if there haven’t been enough changes of heart, the day after President Putin approved a law that, starting from Friday, forces hostile countries to pay gas in rubles by opening an account at a Russian bank, while Kommersant newspaper reported that Gazprom is currently evaluating the consequences of stopping gas exports to hostile countries.

On Wednesday, Spain’s CPI surged from 7.6% to 9.8% and, according to the Spanish Minister of Economy, ca. 73% of the increase is caused by the invasion’s impact on energy and food prices. The same scenario was seen in Italy, which reported a 6.7% inflation YoY and 1,2% MoM, in France, with a 5.1% YoY and a 1.6% MoM, and in the whole Eurozone, with a 7.5% YoY and 2.5% MoM.

These figures may prompt the ECB to be more hawkish, thus investors are already pricing more than 50 bps of tightening. However, according to ECB President Lagarde, food and energy prices should stop rising, allowing the Eurozone not to enter in a period of stagflation.

Rest of the world

Beijing said that it firmly opposes the U.S. decision to add China Telecom (Americas) Corp and China Mobile International USA to the list of companies that are deemed as a threat to national security. These practices are condemned by the Chinese government, which believes that they are not in line with WTO rules.

Meanwhile, Kioxia Holdings Corp, a Japanese memory chip manufacturer, experienced an output disruption due to a contamination, and this forced Apple to explore alternative sources of supply in countries like China. This event can be related to the more general industry-wide shortage of chips that caused supply disruption in the automotive and electronics industries.

China is facing COVID closures in its major cities: after Shanghai, also half of Beijing entered a lockdown on Monday. According to the Hong Kong University, the economic effect could be as high as 46$ bln monthly loss in GDP. Goldman Sachs predicted that Hong Kong residential property prices could drop as much as 20% by 2025, due to the COVID-19 outbreak and a rise in interbank rates which caused household income to diminish.

The geopolitical tensions are pushing countries to strengthen their defence capabilities. On Tuesday, Australia announced a 7.4$ bln investment in intelligence, cybersecurity, and equipment, with a special focus on cyberwarfare. On the same day, the country deployed a series of extraordinary economic measures, ​​from fuel-tax cuts to cash handout to tackle the impact of rising living costs.

FX and Commodities

On Monday, the JPY/USD hit a seven-year low, dropping more than 2% to ¥125 per dollar after the Bank of Japan put in place a 0.25% yield cap and offered to buy an unlimited amount of government bonds for the first four days of the week. These decisions confirm that BOJ’s expansionary monetary policy greatly diverges from the ones of the Fed and the ECB. While the BOJ aims to reach its inflation goals by weakening the yen, households will be likely to suffer if this situation is prolonged. A more comprehensive analysis of the yen’s recent weakness can be found in last week’s article here.

Meanwhile, the ruble has regained its power relative to USD, having lost more than 40% after February 24. The positive evolution of peace talks, together with the increase in interest rates and the accumulation of hard currency by the Russian Central Bank, thanks to a law that orders companies to convert 80% of foreign currency received under export contracts into rubles, might explain how the ruble has erased its losses.

Source: Bocconi Students Investment Club

On Tuesday, WTI and Brent lost respectively 7.94% and 6.77%. The reasons for this, other than the diminished geopolitical risk, is that the lockdown of Shanghai, which accounts for 4% of total Chinese oil production, and Beijing, will reduce the oil consumption of the world’s largest oil importer by a little less than a million barrels per day. The OPEC+ meeting on Thursday confirmed that the oil production will increase by 432k barrels per day starting from May, and the next meeting is set on May 5. On the same note, U.S. President Joe Biden is considering drawing a million barrels daily (5% of U.S. daily consumption) from emergency oil reserves, possibly reaching up to 180 million barrels over the next six months. Consequently, WTI lost 5.2% reaching $102.

Next week main events

Since we have talked about how the Yen’s recent weakness could impact households, it will be interesting to see both the Household Spending and the Household Confidence in Japan, respectively on Monday and Friday. Moreover, Russian CPI and Quarterly GDP will hint to which extent the invasion of Ukraine is affecting the Russian economy.

Events
Monday Europe: PPI (MoM and YoY, Feb) – Germany: Import, Export (MoM, Feb)

Japan: Household Spending (MoM and YoY, Feb)

Tuesday Italy: Public Deficit, Composite PMI, Services PMI (Q4)

US: ISM Non-Manufacturing (Mar) – Australia: RBA Interest Rates (Mar)

Wednesday Russia: CPI (MoM and YoY, Mar)
Thursday Germany: Industrial Production (Mom, Feb) – China: FX Reserves in USD (Mar)

US: Consumer Credit (Feb)

Friday Japan: Household Confidence (Mar) – Canada: Unemployment Rate (Mar)

Brazil: CPI(MoM and YoY, Mar) – Russia: GDP Quarterly (YoY, Q4)

Brain Teaser #21

1972 IMO P1. Prove that from a set of ten distinct two-digit numbers, it is possible to select two disjoint subsets whose members have the same sum.

Solution:

We start by finding the number of distinct subsets of the ten numbers initial set, which is 210-2, as the full and the empty set are excluded. Then, we find the range of attainable sums of these subsets, with the smallest sum to be – 10 and the largest – 855 (for the subset {91, 92, …, 99}). As there are more subsets than attainable sums (1022>846), two subsets will have the same sum by the pigeonhole principle. Since the two subsets need to be disjoint, we can eliminate the elements they have in common, if any, and still have two subsets with the same sum.

Brain Teaser #22

1972 USAMO P3. A random number selector can only select one of the nine integers 1, 2, …, 9, and it makes these selections with equal probability. Determine the probability that after n selections (n>1), the product of the n numbers selected will be divisible by 10.


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