Bomb Damages Crimean Bridge, a Key Supply Artery for Russia’s War Effort | Russia Retaliates

Traders await U.S. inflation reports this week | USDA supply/demand updates Wednesday

U.S. government offices and many banks are closed Monday for the Columbus Day national holiday.

A Ukrainian attack severely damaged the Kerch Strait Bridge, the primary supply line for Russian food, fuel, ammunition and reinforcements into the Crimean Peninsula and southwestern Ukraine. It is the single-most important piece of infrastructure in the war, with some saying it is the first true turning point in the Ukraine War. Says Peter Zeihan: “Kerch is only half the solution to Ukraine’s problems. Now that Ukraine has severed the supply connection, it will need to prevent the Crimea from supplying itself. It would do that by recapturing the cities of Kherson and Nova Kokhova, both on the Dniepr River. From there Ukraine can disable the sluice gate which provides water to the Crimean Canal. Without irrigation, food production in Crimea would drop by at least two-thirds. Unable to ship in food via Kerch, the result (months later) would be a famine from which Russian forces would be unable to recover.”

In retaliation, Russia struck Kyiv, multiple Ukrainian cities; many are dead in retaliation for the weekend attack on the Kerch Straight Bridge.

The strong dollar is bad news for multinational companies. Although the recent rise in the dollar is a boon to U.S. travelers, it’s bad news for exports, which make up about 40% of sales for S&P 500 companies. A strong dollar means American goods are more expensive to overseas buyers, and less profitable back home when foreign revenues are converted into dollars. We have more below.

White House issued sweeping restrictions on selling semiconductors and chip-making equipment to China, an attempt to curb the country’s access to critical technologies.

Bank of England offered further support for pension funds amid crisis. The bank offered to buy long-dated U.K. government bonds in larger amounts and said it would provide continuing support to pension funds that have been at the heart of the U.K.’s bond-market crisis. Britain’s government will unveil its fiscal plan and economic forecasts on Oct. 31, nearly a month ahead of schedule, amid pressure from investors and lawmakers.

Ben Bernanke was awarded the Nobel economics prize. The former Fed chair and two other academics were recognized for their research into banks and financial crises. Their insights “have improved our ability to avoid both serious crises and expensive bailouts,” the chair of the prize committee said. Bernanke, now at the Brookings Institution, is most famous for leading the Federal Reserve during the financial crisis of 2007-08 and through the U.S. economy’s recovery through 2014.

South Carolina pulls money from BlackRock over ESG. The state’s treasurer plans to withdraw $200 million from the firm by year end, joining states like Louisiana and Utah. Red states have committed to pulling investments to punish the firm over its commitment to environmental investing policies.

U.N. officials are headed to Russia later this month to work a deal that would extend or expand the Ukraine grain export accord. Details in Russia/Ukraine section.

USDA confirms HPAI in Arkansas commercial broiler breeder flock. Details and impact in Livestock section.

North Korea’s state news agency said that the country’s testing of 12 ballistic missiles over the past week, including one which flew over Japan, was intended to simulate a nuclear attack to “wipe out” targets in South Korea. The launches were a response to recent American and South Korean naval drills around the Korean peninsula.

Election Day 2022 is 29 days away. Election Day 2024 is 757 days away.

Equities today: Global stock markets were mostly lower overnight. U.S. stock indexes are pointed to slightly lower openings. The third-quarter reporting season kicks off as JPMorgan, Morgan Stanley and other major banks are reporting their numbers, while Delta Air Lines also unveils. John Butters of FactSet said the third quarter had already seen the biggest earnings estimate cuts for S&P 500 companies in more than two years. Just 65 companies in the S&P 500 have warned that third-quarter results are likely to disappoint, according to the market data firm FactSet, while 41 companies have delivered earnings upgrades. And S&P 500 companies are expected to report that on average, revenue jumped by nearly 9% last quarter. But profits are only expected to grow by 2.4%, the most lackluster increase since the worst days of the Covid pandemic in 2020. Meanwhile, two key inflation reports are on tap this week: the Producer Price Index on Wednesday and the Consumer Price Index on Thursday. In Asia, Japan closed. Hong Kong -2.95%. China -2.38%. India -0.47%. In Europe, at midday, London -0.50%. Paris +0.17%. Frankfurt -0.51%.

U.S. equities Friday: The Dow fell 630.15 points, 2.11%, at 29,296.79. The Nasdaq was down 420.91 points, 3.80%, at 10,652.40. The S&P 500 fell 104.86 points, 2.80%, at 3,639.66.

Friday’s market losses trimmed the gains for what started out as a big comeback week for stocks, with the Dow rising 2% for the week, the S&P advancing 1.5%, and the Nasdaq adding 0.7%.

The average U.S.-stock fund fell 4.5% in the third quarter, according to Refinitiv Lipper data. The average fund is down 24.8% for the year to date. Only a handful of stock-fund managers have managed to stay in positive territory.

Agriculture markets Friday:

• Corn: December corn futures rose 7 3/4 cents to $6.83 1/4, a gain of 5 3/4 cents for the week.
• Soy complex: November soybeans rose 9 cents to $13.67, up 3 3/4 cents for the week. December soymeal rose $7.30 to $400.70 and December soyoil rose 58 points to 66.60 points.
• Wheat: December SRW wheat rose 1 1/4 cents to $8.80 1/4, down 41 1/4 cents for the week. December HRW wheat gained 3 3/4 cents to $9.68 3/4, down 22 3/4 cents for the week. December spring wheat rose 5 1/2 cents to $9.68.
• Cotton: December cotton rose 116 points to 84.06 cents, down 128 points for the week.
• Cattle: December live cattle futures rose 17.5 cents to $148.05, up $1.00 for the week. November feeder cattle fell 80 cents to $175.625, up $1.00 for the week.
• Hogs: December lean hog futures fell 62.5 cents to $77.15, up 92.5 cents for the week. The CME lean hog index fell 16 cents to $92.77, the lowest since Feb. 14, and is expected to drop another 12 cents today.
  

Ag markets today: Wheat futures led a price surge in the grain and soy markets overnight as escalating war concerns sparked supply concerns from the Black Sea region. As of 7:30 a.m. ET, corn futures are trading 10 to 11 cents higher, soybeans were 22 to 28 cents higher, winter wheat futures were 35 to 40 cents higher and spring wheat was 22 to 28 cents higher. Front-month crude oil futures were around 80 cents lower and the U.S. dollar index was nearly 300 points higher.

Technical viewpoints from Jim Wyckoff:

On tap today:

• Federal Reserve speakers: Chicago’s Charles Evans on the economy and monetary policy at 9 a.m. ET, and Vice Chairwoman Lael Brainard on “Restoring Price Stability in an Uncertain Economic Environment” at 1:35 p.m. ET.
• International Monetary Fund and World Bank hold their annual meetings in Washington, D.C., this week.

Another test ahead to see if price controls work. The highest inflation in decades and the steep drop in Russian natural gas exports to Europe have pushed several governments to experiment with ways to control energy prices. The Wall Street Journal said (link) the plans will test the economic wisdom that price controls distort markets and create supply shortages. In the U.K., the new government is planning to cap household energy costs and pay utilities the difference between the cap and market prices, and Germany is working up plans to cap the cost of electricity and natural gas.

The European Union has approved both a plan to claw back some energy companies’ profits and redistribute them to consumers, and it is also exploring the creation of a cap on the price of natural gas across the bloc.

The U.S. is leading an effort with its allies to cap the global sales price of Russian oil, while a United Nations agency last week called for policy makers to opt for price caps and windfall taxes to fight inflation.

Bottom line, according to the WSJ: “Economic textbooks predict that imposing a lower price on a product will reduce its supply. Unless demand is also sufficiently reduced, possibly through rationing, the mismatch between supply and demand can create shortages. Enforcing price controls can also be difficult and require a large bureaucracy. And since controls are usually lifted at some point, higher costs to consumers are only delayed, not prevented.”

The IMF has approved a $1.3 billion loan for Ukraine, its first loan to the country since March amid Russia’s ongoing war there. And the IMF has also approved an emergency finance “food shock window” to help economies that are being hurt by the rising price of agricultural products.

Market perspectives:

• Outside markets: The U.S. dollar index is firmer. U.S. bond market is closed for a holiday. Crude oil is under pressure largely on profit taking, with U.S. crude trading around $91.95 per barrel and Brent around $97.20 per barrel. Gold and silver futures are little changed in electronic trading, with gold around $1.683 per troy ounce and silver around $19.81 per troy ounce. Gold rallied 2.01% last week.

• The strengthening U.S. dollar threatens to undermine a rebound in American manufacturing, handing foreign producers an advantage in selling into the United States. The U.S. dollar’s surging value relative to the euro, the Japanese yen, the British pound and other currencies is making foreign-made goods cheaper to import, while exports of U.S.-made goods grow more expensive for foreign buyers. For U.S. manufacturers operating overseas factories, their sales in foreign currencies are worth less in dollars now because of the unfavorable exchange rates caused by the strengthening dollar.

• Treasury yields higher. The hotter-than-expected jobs data fueled selling that knocked more than 600 points off the Dow Jones Industrial Average on Friday and drove the yield on the 10-year Treasury note, which rises when bond prices fall, back toward multiyear highs. The U.S. Treasury cash market is closed Monday for the holiday. Meanwhile, U.K. government bond yields rise after the Bank of England boosted intervention.

• WTI crude oil futures rallied a huge 16.88% last week. WTI broke a downtrend line dating back to the early summer highs, but there is formidable resistance between $93 and $97/barrel that will likely trigger some near-term profit taking.

• Natural gas prices in Europe fall to a three-month low. On Monday, Europe’s natural gas prices fell to the lowest level in three months thanks to mild weather and a high level of LNG imports. Natural gas prices were down nearly 8% in early trading in Amsterdam. Meanwhile, gas storage in the EU is now at more than 90% and the bloc has managed to reduce its gas consumption by 10%

• A backup of more than 2,000 boats and barges on the Mississippi River is being cleared as two closures along the waterway reopened, Bloomberg reports (link). Low water levels had halted commercial shipments of commodities, including recently harvested corn and soybeans, in the latest supply chain snarl that came in the middle of the autumn harvest and amid prolonged local drought. By Sunday, the river had reopened at two choke points: near Stack Island, Mississippi, and near Memphis, Tennessee, the U.S. Coast Guard said.

• West Coast ports. Talks to broker a deal for 22,000 dockworkers on the West Coast are moving along, despite dragging longer than anticipated, according to Labor Secretary Marty Walsh.

• Ag demand: Algeria tendered to buy a nominal 50,000 MT of optional origin soft milling wheat.

• NWS weather: There is a Slight Risk of excessive rainfall over parts of the Southern High Plains through Tuesday morning... ...There is a Marginal Risk of excessive rainfall over parts of Southeastern California from Monday into Wednesday morning... ...There are Frost Advisories over parts of the Eastern Ohio Valley/Central Appalachians and Northern New England.

Items in Pro Farmer’s First Thing Today include:

• Strong price gains to open the week
• U.N. aid chief ‘reasonably confident’ on extension of Ukraine deal (details in Russia/Ukraine section)
• China’s hog futures surge on supply concerns (details in China’s section)
• Cattle traders being cautious
• October hogs move premium to cash index

— Russian authorities reported on Saturday that a large blaze erupted on the only bridge linking mainland Russia to the occupied Crimean Peninsula. The blaze reportedly set fire to seven oil tankers being carried by rail to Crimea, with thick black smoke seen rising into the sky. The 12-mile crossing is a pair of road and rail bridges spanning the Kerch Strait that Russia uses to move military equipment into Ukraine.

While Ukrainian officials have threatened to hit the strategic bridge in the past, there was no direct claim of responsibility from Kyiv. “The guided missile cruiser Moskva and the Kerch Bridge — two notorious symbols of Russian power in Ukrainian Crimea — have gone down,” the Ukrainian government tweeted. “What’s next in line, Russkies?” Vladimir Putin accused Ukraine’s “secret services” of carrying out the attack.

Russia forcibly seized Crimea from Ukraine in 2014, and the 12-mile bridge, built at a cost of nearly $4 billion, provided a key supply route for Russian forces deployed to southern Ukraine’s Kherson region amid Russian President Vladimir Putin’s war in the country. Reports note that the peninsula has enough fuel for more than a month and enough food for two months. Food prices immediately rose, with milk prices jumping 50% and beer 25%. Crimean authorities said they would prosecute price gouging.

Mykhailo Podolyak, a senior adviser to Ukrainian President Volodymyr Zelensky, tweeted Saturday morning that the Kerch explosion marked just “the beginning… Everything illegal must be destroyed, everything that is stolen must be returned to Ukraine, everything occupied by Russia must be expelled,” he wrote.

Russia rushed to launch ferry services as an alternative, a move made difficult by stormy weather. Crimean authorities said passenger traffic resumed Saturday afternoon on the two surviving lanes of the four-lane road bridge, and rail services should be restarted soon. Russian lawmakers and politicians called for retribution.

Ukrainian commanders had publicly promised to attack the bridge as recently as June. And a Ukrainian government official told the Washington Post on Saturday that Ukrainian special services were behind the bridge attack. The Ukrainska Pravda news site first reported the government’s purported role, citing an unidentified law enforcement official who said Ukraine’s security service, the SBU, was involved.

Meanwhile, Russian rockets killed or injured dozens of civilians in strikes on Zaporizhzhia, Moscow announced the appointment of a new commander for its forces in Ukraine, and Putin has called a meeting of his Security Council for Monday amid hardliners’ calls for more decisive action in Ukraine. Today, Russia unleashed a lethal barrage of strikes against multiple Ukrainian cities Monday, smashing civilian targets including downtown Kyiv where at least eight people were killed.

Russia’s Defense Ministry said its strikes on Ukraine had “achieved its goal.” Echoing Putin’s address, it said “military command, communications and energy facilities” were struck and that “all targets have been hit.”

— U.N. keeps trying to extend/expand agreement allowing Ukrainian grain exports via the Black Sea, but no accord yet, according to U.N. officials. “We’re trying to remove the uncertainty to ensure that people are publicly saying that ‘yes, this will be extended a further year,’ but we’re not there yet,” United Nations (U.N.) spokesman Stephane Dujarric said, noting efforts are also underway to try and facilitate Russian grain and fertilizer exports. U.N. officials will be traveling to Russia in around a week to discuss the situation, he noted. “The Secretary General and his team are engaged in intense contacts on these issues. Mr. Guterres and the team are working hard on having an expanded and extended Black Sea Grain Initiative,” he said. “They’re working actively to remove also the last obstacles to facilitate the export of Russian grain and fertilizer.”

— China’s hog futures surge on supply concerns. China’s hog futures jumped on Monday after a surge in demand during the week-long National Day holiday pushed prices higher. Dalian January hog futures posted the biggest daily gain since hog futures were launched last year. China’s state planner said on Sunday it will release its fifth batch of pork reserves, without specifying the amount. In September, China sold 200,000 MT of pork from state reserves to ease rising prices.

— Former Gov. Bill Richardson said Sunday he is “cautiously optimistic” that Americans Brittney Griner and Paul Whelan will be released and suggested they could be freed from Russia by the end of the year. Richardson recently traveled to Russia to discuss the possible release of the detained WNBA star and former U.S. Marine with Kremlin officials. Richardson also said that he’s working with the families of both Americans and coordinating with the White House for their release.

— Russian oil exports fell to their lowest level in a year, according to data from S&P Global. In a sign that Moscow may be struggling ahead of Western plans for a price cap on Russian crude, the country is leaning more on Asian buyers.

— U.S. Commerce Dept. imposed new limits on the export of advanced computer chips to China. Firms will need to acquire a license to export the chips, which America said China was using to advance its army’s technological prowess and “commit human rights abuses.” The new rules not only require U.S. companies to get special permission to send the chips to China, they also ban countries worldwide from selling to China if they’re made with U.S. equipment. China called the move “sci-tech hegemony.”

— Covid cases are on the rise in China, even though officials have ramped up restrictions that many have already deemed excessive. Daily Covid counts have more than doubled in the past week, to around 1,400 cases on Friday — small by global standards but still high for China. Authorities in China are sticking closely to their “zero Covid” policy before an important Communist Party congress starts on Oct. 16, at which China’s president, Xi Jinping, is expected to expand his authority and claim another term in power.

— Official data released in recent days showed consumer spending in China falling sharply during the seven-day National Day holiday when compared with a year earlier, while a private survey of services activity fell into contraction in September. Travelers in China made fewer trips than a year earlier, tourism spending was less than half of the level in 2019, and China’s box office, another closely watched measure of consumption, marked its worst result for a National Day holiday since 2014.

— Proposition 12: SCOTUS focus on Tuesday. On Tuesday the Supreme Court will consider where to draw the line in a challenge (National Pork Producers Council v. Ross) to California farm-animal regulations that has far-reaching implications. See The Week Ahead (link) for a curtain raiser on the topic. Meanwhile, Link to Wall Street Journal editorial on the issue.

— USDA confirms HPAI in Arkansas commercial broiler breeder flock. USDA’s Animal and Plant Health Inspection Service (AHPIS) confirmed highly pathogenic avian influenza (HPAI) in a commercial broiler breeder flock in Madison County, Arkansas, the first HPAI case in Arkansas since 2015, according to state officials. The location has been quarantined and 57,000 birds were destroyed. This brings the total of states where commercial poultry operations have been confirmed with HPAI to 24. USDA data shows Arkansas accounting for 10.8% of birds harvested in August.

— Summary:

• Global Covid-19 cases at 621,534,037 with 6,557,662 deaths.
• U.S. case count is at 96,699,253 with 1,062,564 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 624,198,981 doses administered, 268,373,101 have received at least one vaccine, or 81.45% of the U.S. population.

— Just 4% of eligible Americans have gotten the new Covid booster shot ahead of possible winter surge. Many Americans are fatigued by covid messages, doubtful about the threat and have reached their own conclusions about how best to navigate the pandemic. With overall booster rates also low — just one-third of eligible Americans have received any booster at all.

— Australia ends its mandatory Covid-19 isolation requirements on Oct. 14. The country had some of the world’s strictest lockdown restrictions at the height of the pandemic.

— Democratic Georgia governor candidate Stacey Abrams on whether she’s struggling to get sufficient Black voter support, on Fox News Sunday: “I think it’s a manufactured crisis designed to suppress turnout. And what I would say is if you look at my polling numbers and the polling numbers of my ticket mate, Sen. Raphael Warnock, we are polling similarly well with Black voters. We know, however, that Black voters, like every voting population, deserves the respect of having someone come and speak with them, engage them.”

— Rep. Elissa Slotkin (D-Mich.) on whether she’ll back Biden in 2024, on NBC’s Meet the Press: “We need a new generation, we need new blood. Period. … But if the sitting president of the United States decides to run, we’re going to support him.”

— New York’s mayor, Eric Adams, declared a state of emergency to grapple with the city’s sudden international-migration crisis. With record numbers of asylum-seekers crossing America’s southern border, Republican governors have been packing them on coaches with one-way tickets to Democratic-led jurisdictions. Some 17,000 have rocked up in New York since April. Adams said one in five of the city’s homeless are now asylum-seekers. New York City said it could cost at least $1 billion to deal with.

— Ben Bernanke, Douglas Diamond and Philip Dybvig won the Nobel Memorial Prize in economic sciences for research that significantly improved collective understanding of banks’ role in the economy and “reduces the risk of financial crises developing into long-term depressions.” They will split a $885,000 prize.

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