What if United States fails in honoring its payment obligations?

In China, Beijing maintains capital controls. The Chinese Communist Party (CCP) has been tightening its influence over the economy for years, raising questions about just how secure it is to use the yuan. This is good news for the US, but it may soon be old news. Failure by the US to honor its payment obligations, or even the possibility, would put such concerns in a very different perspective.

An outright default by the Treasury Department on US government debt would be enormously disruptive to the global financial system. Michael Feroli, Chief US Economist at JPMorgan Chase says, “It is quite plausible that it would precipitate a severe financial crisis.”

If Congress doesn’t raise the debt limit, the Treasury can employ a variety of highly questionable maneuvers to keep honoring US obligations. But doing that might shake investor confidence in the rule of law in the US, Feroli wrote in a note to clients Friday. By autumn, Wall Street analysts predict, the Treasury will be forced to decide whether to use those tricks or default on payments.

Biden and Xi Jinping have been sparring over whose political-economic system is a better model for human development. In his first address to a joint session of Congress as president two years ago, Biden said, “Xi and other autocrats think that democracy can’t compete in the 21st century with autocracies because it takes too long to get consensus”.

Washington has gone through debt-limit battles repeatedly over the years, and yet the role of the US$ and broader credibility of the US in the global financial system has remained strong. What’s different this time is the leverage far-right Republicans in the House have thanks to concessions by Kevin McCarthy in his desperate fight to become speaker. 

“Even the best case will probably see the sort of brinksmanship that occurred in the 2011 debt ceiling crisis,” Feroli said. And that episode resulted in a stock-market selloff that went global.

As compared to 2011, China today offers a much more attractive alternative to US financial markets. For one thing, it’s now open to foreign bond and equity inflows in a way that it wasn’t back then. After China finishes its abrupt, wrenching and catastrophically deadly reopening, the economy ought to be humming. It is near US$4 trillion central government bond market has plenty of scope to boost overseas ownership.

The potential contrast could have long-term effects, at a time when even some Western money managers question the relative merits of the two systems.

“Given the bickering in the US, it is no longer clear that the US form of democracy clearly works better than the autocratic CCP approach,” said Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London.

US political partisanship is a major factor from which the Chinese Communists have derived considerable confidence in themselves.

Ukraine: Fighter jets to follow tanks

Ukraine’s breakthrough in securing heavy tanks from the United States and Germany has paved way for talks about sending the US F-16 fighter jets to Ukraine to defend its airspace.

The government of Ukraine quickly renewed its calls for world-class fighter jets after it secured the victory on tanks, arguing it needed the help to defend itself against Russia.

Shortly after the US announcement on tanks, Yuriy Sak, an adviser to Ukraine’s defense secretary, told The Hill that Kyiv would do everything possible to secure the fighter jets.

And Dymytro Kuleba, Ukraine’s minister of foreign affairs, tweeted Wednesday morning that Ukraine has new tasks ahead, naming western fighter jets as one of them.

ArmyINFORM, an information agency for Ukraine’s ministry of defense, also published an article Wednesday suggesting that Ukrainian pilots are already training in the US, but there has been no public announcement on such a program.

Asked to comment on the possibility of fighter jets going to Ukraine, National Security Council spokesperson John Kirby  on Wednesday said he had no news to share.

“Can’t blame the Ukrainians for wanting more and more systems,” Kirby said. “It’s not the first time they’ve talked about fighter jets, but I don’t have any announcements to make on that front.”

Kyiv operates a fleet of aging Soviet aircraft and has requested western, modern fighter jets since the onset of the war — but so far it has remained out of the nation’s grasp.

Supplying jets would be another escalation in terms of US support for Ukraine, and the Biden administration has been careful in offering support that might intensify the conflict with Russia — particularly with the fear of nuclear weapons hovering over the war.

Yet the supplying of jets seems much less unlikely after the Biden administration made a major u-turn by agreeing to send 31 Abrams tanks to Ukraine. The administration did so to convince Germany to send Leopard tanks to Ukraine. Germany also gave its blessing for other allies to send the German-made Leopards to Kyiv.

Germany has expressed opposition to sending fighter jets to Ukraine.

“There will be no fighter jet deliveries to Ukraine. This was made clear very early, including from the US President,” Germany Chancelor Olaf Scholz said in remarks to his country’s parliament after the tanks decision. “This position has not changed at all and will not change.”

Despite such remarks, a number of experts think the supplying of jets to Ukraine by the U.S. is now likely to happen.

Ukraine has slowly secured more and more advanced weaponry from the US and European allies, and they say American-made F-16s will probably follow that same course.

Tomasz Blusiewicz, a research fellow at the Hoover Institution, said most of the concerns over sending the jets are probably over logistical questions, such as training and getting the aircraft and related systems delivered.

“I think it’s now really more down to the nitty-gritty, logistical servicing and delivery and training,” he said.

The fighter jets would make a huge difference in the skies over Ukraine in combat against Russian fighter jets, which are much more outdated than western aircraft.

Both Ukraine and Russia are currently using MiG-29 fighter jets and various different models of the Sukhois aircraft, which are extremely inferior to advanced western technology.

Those advocating for sending western aircraft to Ukraine also say the US public would accept it as a means to defend Ukrainian skies and protect civilians from Russia’s relentless bombardments.

Blusiewicz explained the fighter jets, which he described as “Guardians,” would be “even more of a game-changer” for Ukraine than the battle tanks.

“In terms of air superiority, western tech … is light years away,” he said. “And for Ukrainian civilians, it now becomes more realistic to make sure these drones and rockets don’t fall on them.”

The US-made F-15s and F-16s are the cream of the crop, but other advanced fighters such as the Eurofighter Typhoon, Swedish Gripens and French-made Dassault Rafale would all be decisive on the battlefield.

US lawmakers, most of whom have prodded the Biden administration to support more and more advanced weaponry for Kyiv, also appear to show early signs of supporting this next push for the fighter jets.

A statement released by Democratic, Richard Blumenthal, Sheldon Whitehouse, as well as Republican Lindsey Graham on Wednesday applauded the Biden administration for sending tanks to Ukraine but quickly pivoted to a push for fighter jets and long-range artillery systems.

“The combination of tanks, fighter aircraft, and ATACMS will help Ukraine confront the upcoming Russian offensive and go on offense in both the east and the south in an attempt to further erode Russia’s capability to continue fighting in Ukraine,” the statement read. “Let’s give the Ukrainians everything they need to win — now.”

Most of the concerns around supplying advanced weaponry before — from the HIMARS rocket launchers to the western battle tanks — revolved around escalating tensions with Russia. 

But an increasing number of voices say that after the tanks, the F-16s are not likely to be seen as more of an escalation. 

Asli Aydintasbas, a visiting fellow at the Brookings Institute, told The Hill that Russia “defines everything as an escalation.” 

“In reality I think there are some guardrails that have been established between the United States and Russia and there is a tacit understanding not to cross the lines,” she said.

At the same time, Adyintasbas said the US still probably won’t supply the F-16s anytime soon.

“We know the reason why,” she added, “Escalation management.”

 

Intel historic collapse erases US$8 billion from market value

Intel Corp saw about US$8 billion wiped off its market value on Friday after the US chipmaker stumped Wall Street with dismal earnings projections, fanning fears around a slump in the personal-computer market.

The company predicted a surprise loss for the first quarter and its revenue forecast was US$3 billion below estimates as it also struggled with slowing growth in the data center business.

Intel shares closed 6.4% lower, while rival Advanced Micro Devices and Nvidia ended the session up 0.3% and 2.8%, respectively. Intel supplier KLA Corp settled 6.9% lower after its dismal forecast.

"No words can portray or explain the historic collapse of Intel," said Rosenblatt Securities' Hans Mosesmann, who was among the 21 analysts to cut their price targets on the stock.

The poor outlook underscored the challenges facing Chief Executive Pat Gelsinger as he tries to reestablish Intel's dominance of the sector by expanding contract manufacturing and building new factories in the United States and Europe.

The company has been steadily losing market share to rivals like AMD, which has used contract chipmakers such as Taiwan-based TSMC to make chips that outpace Intel's technology.

"AMD's Genoa and Bergamo (data center) chips have a strong price-performance advantage compared to Intel's Sapphire Rapids processors, which should drive further AMD share gains," said Matt Wegner, analyst at YipitData.

Analysts said that puts Intel at a disadvantage even when the data center market bottoms out, expected in the second half of 2022, as the company would have lost even more share by then.

"It is now clear why Intel needs to cut so much cost as the company's original plans prove to be fantasy," brokerage Bernstein said.

"The magnitude of the deterioration is stunning, and brings potential concern to the company's cash position over time."

Intel, which plans to cut US$3 billion in costs this year, generated US$7.7 billion in cash from operations in the fourth quarter and paid dividends of US$1.5 billion.

With capital expenditure estimated to be around US$20 billion in 2023, analysts said the company should consider cutting its dividend.

Pakistan: IMF hopes keep stock market alive

With a controlled hike in the policy rate, along with some positive news flow regarding the start of negotiations between the GoP and the IMF, the market witnessed a rally of 2,400 points from Tuesday to Thursday.

This culminated to the KSE-100 index gaining 5.3%WoW to close at 40,451 points for the week ended on January 27, 2023. As a results average daily trading volume spiked significantly by 76.2%WoW, to 252 million shares.

During the week, the GoP decided to let go of the artificially controlled interbank exchange rate, with PKR subsequently plunging downwards from a US$/PKR parity of 230 to 263, losing 12.5%WoW.

Major news flows during the week were: 1) foreign exchange reserves held by State Bank of Pakistan (SBP) dropped to US$3.7 billion due to external debt repayments, 2) general elections likely to be held in October this year, 3) country to repay US$3 billion debt over the next five months, 4) banks told to give one-time facilitation to importers for release on consignments, 5) currency dealers removed cap on US$-PKR exchange rate, 5) PKR300 billion taxation measures through mini-budget on the way, and lastly 6) IMF team to arrive Pakistan on January 31, 2023.

The top performing sectors were: Miscellaneous, Refinery, E&Ps, Vanaspati & Allied, and Cement, while the least favorite sectors were: REITs, Pharmaceuticals, Textile Weaving, Woolen, and Automobile parts & accessories.

The top performing scrips were: KTML, HBL, SML, KOHC, and CHCC, while laggards were: HINOON, THALL, INDU, ABOT, and SYS.

Flow-wise, Insurance Companies topped the net sellers, offloading US$8.8 million followed by Companies (US$3.9 million), Mutual funds (US$3.7 million) and NBFC (US$0.0 million).

On the buying side Banks emerged top buyers with US$5.0 million, followed by Individuals (US$4.1 million), Brokers (US$3.8 million), Foreigners (US$2.8 million) and Other Organizations (US$0.7 million).

Incoming news regarding developments on the IMF front is bound to invoke a short-term rally, although the longer the agreement takes the more uncertainty will creep back in, keeping investors away.

The PKR eroded value significantly after it was left to market forces, depreciating to PKR263/US$, while country’s foreign exchange reserves dropped to alarming levels (an import cover of merely 3 weeks). Inflation is expected to remain persistent.

US adamant at containing Iran oil sales

The United States is not happy with the upward trend in Iran's oil exports in recent months and intends to take steps to dissuade and put pressure on countries buying oil from Islamic republic, the US state department's special Iran envoy Rob Malley said.

Speaking to Bloomberg TV, Malley said the US extra-territorial sanctions that have been in place on Iran and its oil sales since former US President Donald Trump pulled Washington out of the Iran nuclear deal in 2018 are still very much in place and have not been "loosened or lessened".

He acknowledged the rise in Iran's oil sales since late last year, saying that Washington is monitoring the situation closely, and taking steps to clamp down on the rising flows — particularly when it comes to China. The country has been the biggest destination for Iranian crude by some distance since the sanctions came into force.

"We keep trying…to take the steps we need to stop the export of Iranian oil and deter countries from buying it," Malley said. But when "you focus on China, that's right. It has been the main destination of elicit exports by Iran."

Oil analytics firm Vortexa pegs Iran's overall crude and condensate exports at 1.28 million b/d for the fourth quarter of 2022, up by 56% compared with 818,200 b/d in the third quarter, and up by 51% on 844,700 b/d in the fourth quarter of 2021.

Argus' tracking puts Iran's crude and condensate exports at 1.11 million b/d on average in the fourth quarter, up by 43% from 776,000 b/d in the third quarter, and by 58% from 704,500 b/d in the corresponding quarter in 2021.

The increase in Iranian shipments coincided with a rally in Chinese demand for oil with refinery runs hitting an 18-month high in November 2022, and remaining high in December 2022. Chinese imports from Iran via Malaysia rose to a record high 1.2 million b/d in November, as independent refiners in Shandong province raced to use up their 2022 import quotas, according to Argus data.

Malley said the US has been in contact with the Chinese authorities on the issue and will continue to take steps to sanction all individuals and entities that are found to be involved in the import of Iranian oil. "The conversations we've had with the Chinese, which go back several months, will be intensified," he said.

The US Treasury Department most recently targeted 13 companies in November registered in China, Hong Kong, the Marshall Islands and the UAE over alleged facilitation of oil trader and contravention of US sanctions.

Malley admitted that the US' sanctions on Iran has been far from "perfect" so far but said the US will "do as much as we can" and "everything in our power to make sure that our sanctions are enforced.

 

Pakistan: Revised conditions approved for sugar export

The meeting of the Economic Coordination Committee (ECC) of the Cabinet has revised conditions regarding mode of payment and time period for realization of export proceeds of sugar and decided that cane commissioner Punjab would allocate quota of sugar to the exporters.

The meeting of the ECC presided over by Finance Minister Ishaq Dar on Thursday allowed Provincial Cane Commissioners Punjab as in the case of Sindh to allocate quota within seven days after the issuance of notification and export of sugar within 45 days of allocation of the quota.

The ECC also decided that export proceeds would be received either in advance through banking channel, or within a period of 60 days of opening of Letter of Credit (L/C) for export of sugar on a summary moved by the Ministry of Commerce.

The meeting was informed that the ECC has already allowed export of a total of 250,000 metric tons of sugar on January 03, 2023. However, certain queries have been raised by the stakeholders in the process of export of sugar.

The meeting was further informed that the SBP has highlighted that the ECC’s decision does not specify any timeline for shipment of the export consignment after approval of quota. It poses the risk that exporters may avail quota but not execute the transaction, or may stretch it beyond the timeframe of two months.

The SBP has, therefore, recommended that shipment of consignment be ensured within 30 days of quota allocation. In addition, Pakistan Sugar Mills Association - Pujnab Zone (PSMA-PZ) has also requested that quota for export of sugar may be allocated through Cane Commissioner Punjab as done in the case of Sindh.

The ECC meeting after detailed discussion approved the revised conditions that include: 1) export proceeds shall be received either in advance through banking channel, or within a period of 60 days of opening of LC for export of sugar; 2) the exporter shall ensure that the consignment is shipped within 30 days of quota allocation; and 3) quota for export of sugar may be allocated from already decided provincial quota, through Provincial Cane Commissioner, Punjab, as already approved by the ECC in case of Sindh.

The meeting was attended by Federal Minister for Commerce Syed Naveed Qamar, Federal Minister for Power Khurram Dastgir Khan, Federal Minister for Industries and Production Syed Murtaza Mahmud, Minister of State for Finance and Revenue Dr Aisha Ghous Pasha, Shahid Khaqan Abbasi former prime minister and member of National Assembly, Special Assistant to Prime Minister (SAPM) on Finance Tariq Bajwa, SAPM on government effectiveness Dr Muhammad Jehanzeb Khan, Coordinator to Prime Minister on Commerce and Industry Rana Ihsan Afzal, Governor SBP, federal secretaries, and other senior officers.

 

Northrop Grumman expects strong 2023 revenue on weapon demand surge

US defense contractor Northrop Grumman Corp on Thursday forecast full-year sales above Wall Street estimates, as it benefits from strong demand for weapons from countries ramping up their defense spend.

The United States and its allies have been buying more arms and ammunitions and supporting Ukraine with billions of dollar in military aid after Russia invaded the country last year.

During the quarter, Northrop rolled out its new B-21 Raider jet, the first of a new fleet of long-range stealth nuclear bombers for the United States Air Force.

"We're raising our sales outlook for 2023 and expect to deliver strong multi-year cash flow growth," Northrop Grumman Chief Executive Kathy Warden said.

The Falls Church, Virginia-based company expects 2023 sales between US$38 billion and US$38.4 billion, ahead of the average analyst estimate of US$37.86 billion, and an adjusted profit of US$21.85 to US$22.45 per share, as compared to the estimates of US$22.30, according to Refinitiv IBES data.

Meanwhile, rivals General Dynamics Corp and Lockheed Martin Corp forecast their annual profit below estimates, as the industry grapples with labor and supply shortages.

Northrop, which produces the fuselage for the F/A-18 Super Hornet fighter jet, posted sales of about US$10.03 billion for the quarter ended December 31, 2022, ahead of analysts' average estimate of US$9.66 billion.

Sales in its space systems unit, which makes satellites and payloads, jumped 23% to US$3.28 billion, helped by higher investments towards space exploration projects.

Sale in its defense unit, which makes integrated battle management systems, weapons systems, rose to US$1.66 billion, from US$1.38 billion.

Overall adjusted net income stood at US$7.50 per share, ahead of analysts' average estimate of US$6.57 per share.