Will China’s supply chain issues cause problems for the Fed this week?

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(Monday Market Open) Geopolitical risks weigh on the markets as a new week of trading is about to start. Stock index futures were much higher overnight, but significantly reduced those gains. In fact, Nasdaq futures rose about 100 points but turned negative before the open.

Investors had reason to be positive when they learned that the virtual peace talks between Russia and Ukraine had progressed. Russia can be pressured from various places. Over the weekend, it was reported that Russia was running out of ammunition and was asking for help from China; however, China denied the report. In addition, Russia is at risk of not repaying its debt, as the ruble has weakened considerably and a large part of Russian assets are tied by sanctions.

Many commodities are backing off on news around the Russian-Ukrainian conflict. Crude oil was down about 4% before the opening bell. Natural gas was down 1.61%. And RBOB essence was down 2.7%. Other commodities that have been directly tied to Russia are also down in premarket action. Palladium futures decreased by 7.48%, and wheat was down 2.94%.

However, the news that seems to be more directly related to stock markets today comes from China. A rise in Covid-19 cases has prompted China to institute more lockdowns in Shenzhen and other cities. China is experiencing its worst outbreak since the pandemic began in 2020. The news caused the Hang Seng Index fall by 4.97% and the Shanghai Composite down 2.6%.

The shutdowns renew problems with supply chains. Apple (NASDAQ: AAPL
) is one business that could be hit hard. Six of Apple’s suppliers, including Foxconn, had to halt production due to the shutdowns. volkswagen and Toyota (NYSE: TM) also had to halt production at their factories in the region. The problems are not just related to manufacturing. Hong Kong fears food supply disruptions will hurt the island city as it imports 90% of its food. Consumers have already seen shortages of foreign import goods.

News in China could complicate the situation for the Federal Reserve, which is expected to meet this week to determine interest rates. Because there is little the Fed can do to control or help supply chains, the market still expects the Fed to hike rates by just a quarter point. The Fed is struggling to fight inflation, which has risen at a 40-year high, and not crush an economy struggling with many problems, such as the supply chain and the war in Ukraine.

Ahead of the Fed’s interest rate announcement on Wednesday, she will have a chance to review two other important reports. First, the Producer Price Index (PPI) will be released on Tuesday and is expected to rise 10% year-over-year. A large portion of these input costs come from commodities which have been rising over the past year and have been particularly volatile in the previous weeks. If companies can’t pass those prices on to consumers, they’re likely to see their profit margins shrink and profits plummet.

Then on Wednesday morning, the retail sales report will be released, giving insight into how rising prices are affecting consumers. Inflation often leads consumers to forgo or cut back on luxury items and focus on basic consumer goods.

Market Minutes Review

Stocks jumped on Friday with news that Russian President Vladimir Putin called the changes in the peace talks positive. However, stocks crashed early with the S&P500 (SPX) and the Dow Jones Industrial Average ($DJI) recording losses on the day. the Nasdaq Compound ($COMP) posted a larger loss losing 1.36%.

All sectors ended the day in the red, although Materials, Utilities and Energy were in full swing. Consumer discretionary and technology were at their lowest. Energy and materials were the only positive sectors of the week. the Energy Selection Sector Index increased by more than 2.9%, while Materials Select Sector Index exceeded 1.1%. The Financial Select sector was virtually even for the week. Technology, real estate and consumer discretionary were the worst performers with their corresponding indexes down 2.5% to 3% for the week.

Despite a volatile week of commodity trading, wheat futures had the biggest week, up more than 4%. RBOB Gasoline Futures increased by just over 2%. Crude oil futures increased by 1.85%. Fuel Oil Futures increased by 1.68%. And natural gas futures were the odd man, dropping 7.23% for the week. Looking at commodity markets as a whole, Bloomberg Commodity Index Futures only increased by 1.05%. Over the past three months, each of these futures products has risen significantly, with Gasoline, Petroleum, and Fuel Oil rising more than 50% over this period. Wheat has increased by more than 40%. The commodity index rose more than 30%. And natural gas is up almost 25%. Rising commodity prices are likely to fuel the inflation monster.

CHART OF THE DAY: INFLATION RACE. Bloomberg Commodity Index futures (/AW — candlesticks) are up 30.31% over the past three months. RBOB Gasoline Futures (/RB—Blue) rose 55.75%. WTI crude oil futures (/CL—yellow) rose 53.65%. Oil futures (/HO—red) climbed 52.71%. Wheat futures (/ZW—grey) rose 40.44%. Natural gas futures (/NG—rose) are up 24.83%. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Power failure: Despite the increase in fossil fuels, electric vehicles (EVs) have struggled in 2022. The performance of EV makers who actually make cars today versus those who have plans at some point in the future include Li-Auto (NASDAQ: LI), down 31% year-to-date, You’re here (NASDAQ: TSLA), down 33%, Lucid (NASDAQ: LCID), down 44%, Nio (NYSE: NIO), down 52%, Xpeng (NYSE: XPEV), down 55%, and Rivian (NASDAQ: RIVN), down 63%. Tesla is the only American company to produce a significant amount of cars and the only company to generate profits. Chinese companies Li, Nio and Xpeng have sold tens of thousands of vehicles, but none have yet made a profit.

Then you have a significant number of electric vehicle companies like Lordstown (NASDAQ: RIDE), Fisker (NYSE: FSR), Canou (NASDAQ: GOEV), Xos (NASDAQ:XOS), and Faraday (NASDAQ: FFIE) who have no income or track record, and most of them don’t even make electric vehicles yet. These stocks are down 42.2%, 34%, 30%, 17% and 10% respectively.

If stocks continue to decline and yields continue to rise, it’s hard to say how patient investors will be with these companies. In addition, traditional car manufacturers like Ford (NYSE: F), General Motors (NYSE: GM), and many more are entering the space, making it much more competitive. Then related products are also skyrocketing, such as lithium, which is used in batteries for electric vehicles. Lithium has fallen from around $10,000 a ton a year ago to around $80,000 a ton today, meaning these companies could take even longer to turn a profit.

Recap of winnings: Speaking of earnings, the fourth quarter season is almost over with only four S&P 500 companies yet to report. 76.2% of those companies beat earnings, which is above the historical average of 65.9% but below the recent four-quarter average of 83.9%, according to Refinitiv.

The energy sector continues to shine with the highest percentage increases in earnings growth, despite technology having the largest percentage of surprises above expectations. Financials, Consumer Discretionary and Communication Services are expected to experience negative growth rates in the first quarter, while Energy, Industrials and Materials are expected to experience the highest growth rates. But if 2022 has taught us anything, the future can be unpredictable.

Pressure on Putin: According to The Telegraph, Russia is at risk of defaulting on its bonds, which would effectively be bankruptcy. The World Bank has warned that the sanctions imposed on Russia have been crippling and that Russia and its partner Belarus are now close to defaulting. Russia is due to make a $117 million coupon payment on a sovereign Eurobond next week for its $40 billion debt. There’s a 30-day grace period, but Russia can’t make the payment in its heavily devalued rubles, and most of the foreign currencies Russia holds have been tied down by financial sanctions.

Russia’s default could have a contagion effect, as a default could lead to significant losses for banks, hedge funds and mutual fund companies holding Russian debt. However, Bank of England Governor Andrew Bailey described Russian debt exposure as low and not a systemic risk outside of Russia itself.

Image from Unsplash

TD Ameritrade® Commentary for educational purposes only. SIPC member.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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