Ukraine

The Russian mutiny reveals the underlying trend of domestic instability. Russian instability is negative for global stability. The endgame of the war in Ukraine is exacerbating the problem, likely pushing up the equity risk premium.

Macro and geopolitical risks may spoil the narrow window for a stock market rally before recessionary trends rise to the fore.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

The risk-on rally is challenging our annual forecast so we are cutting some losses. But we still think central banks and geopolitics will combine to reverse the rally later this year.

Prefer government bonds over stocks, defensive sectors over cyclicals, and large caps over small caps. Favor North America over other markets. Favor emerging markets like Southeast Asia and Latin America over Greater China, Turkey, and emerging Europe. Stick with aerospace/defense stocks.

Prefer government bonds over stocks, defensive sectors over cyclicals, and large caps over small caps. Favor North America over other markets. Favor emerging markets like Southeast Asia and Latin America over Greater China, Turkey, and emerging Europe. Stick with aerospace/defense stocks.

Russia’s conflict with the West will escalate and trigger more bad news for risky assets this fall. Beyond that, stalemate looms. Latin American equities present a potential opportunity once the macro and geopolitical backdrop improve.

Investors should go long US treasuries and stay overweight defensive versus cyclical sectors, large caps versus small caps, and aerospace/defense stocks. Regionally we favor the US, India, Southeast Asia, and Latin America, while disfavoring China, Taiwan, Hong Kong, eastern Europe, and the Middle East.

Executive Summary EU Metal Industry Under Threat EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry Russia’s threat to cut off all remaining exports of natural gas to the EU via Ukraine will further imperil the bloc’s struggling metals industry, particularly aluminum smelting – where half of its capacity already has been shut – and zinc refining. The EU will have to prioritize energy security over its renewable-energy goals, given the challenges its manufacturing industries will confront for the next 3-5 years. Surging imports of raw copper concentrates and unwrought metal will consolidate the global dominance of China’s copper refiners, which sharply increased their treatment and refining charges this week. The US likely will see more investment in metals mining and refining on the back of the EU distress, which realistically cannot be addressed until gas and power prices fall to levels that allow them to sustain their operations. Bottom Line: Ongoing supply shocks to the EU’s base-metals industry will force the bloc to prioritize energy security over its renewable-energy goals. This will drive the bloc’s demand for liquified natural gas (LNG) and oil higher, even after short-term measures to increase LNG intake and distribution capacity are completed over the next 2-3 years. We expect the equities of oil and gas producers to outperform metals miners over this period. After being stopped out, we will be re-instating our long XOP ETF position at tonight’s close. Feature Earlier this month, Eurometaux, the EU metals lobbying group, published a memo to the European Commission drawing attention to “Europe’s worsening energy crisis and its existential threat to our future.”1 This is not hyperbole. At the heart of the industry’s woes is a chronic shortage of energy – in any form – for industrial use. Utilities are signing long-term LNG supply contracts to address this shortage, but they can expect to wait 3-4 years or more before gas arrives on Europe’s shores.2 Spot and one-off cargoes will become available over that time, but most of the existing LNG production is under long-term contract. Oil, coal, and nuclear energy are available for power generation, industrial applications and space-heating, and they increasingly are being used in the bloc, but these too are constrained.3 Measures to address the chronic energy shortage hammering the EU base-metals industry will take years to effect, and could come too late to meaningfully preserve existing refining capacity, which has been contracting for years (Chart 1).4 Most of the EU’s metals production is accounted for by aluminum, copper and zinc, which are extremely energy intensive, copper only less so (Chart 2). The surge in LNG prices following Russia's invasion of Ukraine propelled electricity prices higher, given gas is the marginal fuel for EU power generation (Chart 3). This crushed zinc and aluminum refining. Half of the EU’s aluminum smelter capacity – ~ 1mm MT – will be curtailed or shuttered this year, according to European Aluminum.5 Chart 1EU Metal Industry Under Threat EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry Chart 2EU Metals Are Extremely Energy Intensive EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry Chart 3EU Power Price Surge Crushes Metals Refining EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry The surge in European electricity prices and the resulting curtailment or shuttering of zinc refining paced the 2.6% y/y decline in global output in 1H22, which took global production down to 6.77mm MT, according to the International Lead and Zinc Study group. Europe accounts for ~ 15% of global zinc refining.6 Refined zinc consumption fell 3% y/y in 1H22 to 6.74mm MT. China Bingeing On Copper Global refined copper output in the January – July 2022 period slightly outpaced usage – with 3% growth in the former and 2.6% growth in the latter, according to the International Copper Study Group (ICSG). On the back of this report, we lowered our expected supply growth estimate to 3% this year, (Chart 4). This brings our estimate for total supply down by ~400k MT vs. our previous iteration to 25.3mm MT. We are keeping our estimate of 2023 supply growth rate at ~ 4.5%. Our copper demand estimate is a function of real GDP estimated by the World Bank, and remains at just under 26mm MT and 27.2 mm MT for 2022 and 2023 respectively. As a result of the lower 2022 production growth rate, our forecasted copper deficit has widened to ~ 605k tons in 2022 and 480k tons in 2023. The mismatch in supply and demand levels will keep inventories in China and the West under pressure (Charts 5A and 5B). Chart 4Copper Supply Estimate Lowered Copper Supply Estimate Lowered Copper Supply Estimate Lowered   Chart 5AChinese Copper Inventories Continue To Draw Chinese Copper Inventories Continue to Draw Chinese Copper Inventories Continue to Draw Chart 5BAs Do Stocks In The West As Do Stocks In The West As Do Stocks In The West China’s imports of copper condensates – the raw material used to make refined copper – surged to 16.65mm tons over January – August 2022, up 9% y/y. Imports of unwrought and semi-fabricated copper were up 8% over the same period at 3.9mm MT, according to Mysteel.com. As is to be expected, treatment and refining charges at Chinese smelters also moved higher: for 3Q22, refiners were charging $93/MT, up $13 from 2Q22 levels and $23/MT from 4Q21, according to Reuters. These charges increase when raw-material supplies increase, and vice versa. This is meant to be a floor charged for refining concentrates to produce refined copper. Real USD Matches US PPI After Re-Opening In an unusual turn of events, the USD Real Effective Exchange Rate (REER) has been moving higher along with the US Producer Price Index for all commodities. This trend started as the global economy accelerated its re-opening in 2021 (Chart 6). The USD has a profound affect on commodity prices: Most globally traded commodities are denominated in USD, funded in USD and invoiced in USD. This is the channel through which the Fed’s monetary policy impacts commodity buyers ex-US. A stronger dollar means commodities in local-currency terms are more expensive, and vice versa. It also means production costs in states that do not peg their currencies to the USD go down, and vice versa. Chart 6Real USD Gains With US PPI During Reopening Real USD Gains With US PPI During Reopening Real USD Gains With US PPI During Reopening Given the USD’s elevated level, copper prices in local-currency terms will continue to face a massive headwind on the demand side, and a massive tailwind on the production side. For households and firms buying commodities, or durable goods with a lot of metals in them (copper, stainless steel, etc.), Fed policy has a direct effect on how their budgets get allocated.7 In the short and long run macroeconomic variables such as the USD influence copper prices by increasing the cost of copper ex-US when the dollar rallies, and vice versa. Fundamental variables like tight inventories, which arise when demand is consistently above supply, impart an upward price bias to the copper forward curve (backwardation increases as inventories decrease). Domestic economic factors matter, too.  Copper prices have been pummeled by the meltdown of China’s property sector, which has been the growth engine for the country’s economy, accounting for ~ 30% of its copper demand. The USD has remained well bid following Russia’s invasion of Ukraine, presenting a powerful headwind to commodity prices in general. This is particularly true for refined copper, given China accounts for more than 50% of total global consumption. China’s RMB dropped 11.4% vs. the USD from the start of the year to now. This has not stood in the way of a sharp increase in imports of the copper ore and refined metal this year, despite the country’s weak economic performance. Given China’s property-market slowdown and its zero-tolerance COVID-19 policy and its attendant lockdowns, it is difficult to pinpoint a cause for its increased copper demand. It may be opportunistic purchasing – buying the metal when prices are far lower than their peak earlier this year – or it could signal a post-Communist Party Congress increase in economic activity (e.g., more fiscal stimulus hitting the system) officials are preparing for. Investment Implications The EU’s metals-refining sector faces existential challenges as a result of the bloc’s energy crisis. Significant employers – not just the metal refiners – will be confronting limited energy supply and higher costs for years, given the tightness in conventional energy markets – oil, gas and coal. The renewable-energy sector also faces daunting challenges, as a result of difficulties faced by metals refiners and the energy crisis they presently confront. It is worthwhile noting that none of the renewables technology is possible without metals. Given the abundant lessons re reliance on a single supply source Russia’s invasion of Ukraine has provided, we expect investment in US metals mining and refining to increase, as consumers of copper, aluminum and zinc seek to diversify away from Chinese dominance of this sector. This will take time to build out, just as the increase in LNG supplies will take time. This likely will keep a bid under the USD, as manufacturing, mining and refining capex investment shifts to the US. We expect the EU’s drive to secure conventional energy will drive the bloc’s demand for liquified natural gas (LNG) and oil higher, even after currently planned short-term measures to increase LNG intake and distribution capacity are completed over the next 2-3 years. After being stopped out this past week, we will be re-instating our long XOP ETF position on tonight’s close, consistent with our view.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Analyst Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish. European Commission President Ursula von der Leyen proposed additional economic sanctions against Russia yesterday including extending price caps on oil to third countries, following the call-up of reserves in Russia last week, and a veiled threat to use nuclear weapons against Ukraine. In a related matter, Gazprom, the state-owned gas producer and trading company, threatened to cut off the remaining gas sales to Europe via Ukraine – close to half the ~ 80mm cm /d still being sold via pipeline to the continent (Chart 7). It is apparent the EU has been anticipating a full shut-off of Russian pipeline gas shipments, which likely motivates von der Leyen’s proposal. Any proposal to increase sanctions on Russia would have to be unanimously approved. Base Metals: Bullish. In a boost to prospective Chile copper production, a BHP executive indicated he expects regulatory uncertainties in the largest copper producing state to ease. BHP mentioned earlier this year that legal certainty in Chile would be key to investing over USD 10 billion in the state. Earlier this month, Chilean voters rejected a constitution, which, among other things, could have curtailed mining operation by including new taxes and environmental regulations. Precious Metals: Neutral. In their Q2 platinum balances report, the World Platinum Investment Council (WPIC) expects FY 2022 surplus to rise more than 50% vs. its Q1 estimates to 974k oz. Weak platinum ETF demand resulting from a strong USD and rising interest rates is expected to outweigh operational constraints in South African and North American mining operations. Bolstering supply is the fact that Russian platinum – which constitutes ~11% of global supply – has been reaching buyers. However, this security of supply may not last. Once buyers’ long-term contracts for Russian platinum end, as in the case with aluminum, companies may self-sanction, turning to the spot market and other producing states instead. For palladium, SFA Oxford sees the metal's surplus dropping to ~92% y/y, as demand is expected to increase and production is forecast to fall (Chart 8). Chart 7 EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry EU Energy Crisis, Strong USD Imperil Bloc’s Metals Industry Chart 8 Palladium Balances Expected To Drop Palladium Balances Expected To Drop     Footnotes 1     Please see Europe’s non-ferrous metals producers call for emergency EU action to prevent permanent deindustrialisation from spiralling electricity and gas prices, posted by Eurometaux 6 September 2022. 2     See, e.g., Exclusive: German utilities close to long-term LNG deals with Qatar, sources say published by reuters.com 20 September 2022. 3    For additional discussion, please see Energy Security Rolls Over EU's ESG Agenda, which we published 28 July 2022.  It is available at ces.bcaresearch.com. 4    Please see Agenda for a resilient European metals supply for the green and digital transitions, posted by Eurometaux in mid-2020.   5    Please see Reconciling growth and decarbonisation amidst the energy crisis, posted by European Aluminium May 2022. 6    Please see Column: European smelter hits mean another year of zinc shortfall published by reuters.com 17 May 2022.  7    Please see "Global Dimensions of U.S. Monetary Policy" by Maurice Obstfeld, which appeared in the February 2020 issue of International Journal of Central Banking for an in-depth discussion and analysis. Investment Views and Themes Strategic Recommendations Trades Closed in 2022

Executive Summary Higher Brent Prices, Stronger Upside Bias Higher Brent Prices, Stronger Upside Bias Higher Brent Prices, Stronger Upside Bias The Fed is pacing a globally synchronized monetary-policy tightening cycle as the war in Ukraine escalates, following Russia’s mobilization of 300k reserve forces. Despite central-bank tightening, the intensification of the war increases the odds of higher inflation.  This will keep the USD well bid. Russia’s threat to cut oil supplies to states observing the G7 price cap will test US and EU resolve as winter sets in.  Retaliatory output cuts by Russia could send Brent crude oil prices above $200/bbl. The Biden administration remains fearful its G7 price cap and EU sanctions on Russian oil exports will spike prices.  The US will make 10mm barrels of crude from its SPR available in November as a palliative.  Our base case Brent forecast is slightly lower, averaging $105/bbl this year from $110/bbl, due to weaker realized prices.  On the back of this, we expect 4Q22 Brent to average $106/bbl, and for 2023 to average $118/bbl, up slightly vs. last month.  WTI will trade $3-$5/bbl lower. Bottom Line: The economic war pitting the EU and its allies against Russia could escalate and widen as more Russian troops pour into Ukraine.  This raises the odds of expanded conflict outside Ukraine, and higher war-driven inflation.  Our baseline forecast for 2023 remains intact, with a strong bias to the upside.  We remain long the COMT and XOP ETFs to retain exposure to commodities. Feature The Fed is pacing a globally synchronized monetary-policy tightening cycle at a time when the war in Ukraine is escalating. Russia’s mobilization of a reported 300k reserve forces raises the spectre of an expansion of the Ukraine war – perhaps crossing into a NATO state’s border – if tactical nuclear, biological, or chemical weapons are used. This is a low-probability outcome, but it would increase the odds of significantly higher inflation should it come to pass.1 The US central bank lifted its Fed funds rate 75 bps Wednesday to a range of 3% - 3.25% – and strongly indicated further rate hikes will follow. The Fed is one of numerous banks increasing policy rates. This synchronous monetary-policy tightening has not been observed for 50 years, and raises the odds of a global economic recession, according to the World Bank.2 The World Bank notes that since 1970, recessions have been “preceded by a significant weakening of global growth in the previous year, as has happened recently,” and, importantly, “all previous global recessions coincided with sharp slowdowns or outright recessions in several major economies.” The withdrawal of monetary and fiscal support “are necessary to contain inflationary pressures, but their mutually compounding effects could produce larger impacts than intended, both in tightening financial conditions and in steepening the growth slowdown.” Markets are acting in a manner consistent with this assessment, but, in our view, need to expand the risk set to include a higher likelihood of a war widening beyond Ukraine. While this is not our base case, it is worthwhile recalling the link between war and inflation. Prior to and during the 20th century’s two world wars, then the Korean and Vietnam wars, US CPI inflation rose sharply (Chart 1).3 Price controls and tighter monetary policy were needed to address these inflationary episodes. Chart 1A Wider Ukraine War Would Stoke Inflation Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22 Stronger USD Remains Oil-Demand Headwind Fed policy will continue to push US interest rates higher, which will push the USD higher on the back of continued global demand for dollar-denominated assets. This will keep the cost of most commodities ex-US higher in local currency terms, which, all else equal, will weaken commodity demand in general, and oil demand in particular. This will be compounded if tighter monetary policy at systemically important central banks (led by the Fed) results in a global recession in 2023. This is especially true for EM oil demand: The income elasticity of EM oil consumption is 0.61, which means a 1% decrease (increase) in real EM GDP translates into a 0.61% decrease (increase) in oil demand, all else equal. In our base case, we expect global oil demand to grow 2.2mm b/d this year and 1.91mm b/d next year, roughly in line with the US EIA’s and IEA’s estimates (Chart 2). We expect EM demand will increase 1.25mm b/d this year, and 1.90mm b/d next year, accounting for almost all of global growth. As before, we expect China’s oil demand growth to be de minimus this year, on the back of its zero-tolerance COVID-19 policy. EM remains the key driver of our global oil demand assumptions, which, in our modeling, are a function of real income (GDP). Offsetting the stronger USD effects on demand is gas-to-oil switching demand, resulting from record-high LNG prices this year. This will add 800k b/d to demand globally this winter (November – March). Chart 2Global Oil Demand Holding Up Global Oil Demand Holding Up Global Oil Demand Holding Up Oil Supply Getting Tighter Oil supply will remain challenged this year and next, as core OPEC 2.0 – the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) – approaches the limit of what it can supply to the market and still retain sufficient spare capacity to meet unexpected supply shocks (Chart 3). Among the anticipated shocks we believe core OPEC 2.0 is aware of is the loss of 2mm b/d of Russian crude oil output over the next year, due to the imposition of EU embargoes on seaborne crude oil and refined products, which will go into effect 5 December 2022 and 5 February 2023, respectively. The continued inability of non-core OPEC 2.0 states to maintain higher production – “The Other Guys” in our nomenclature – is another foreseeable shock (Chart 4). This is becoming acute for OPEC 2.0, given The Other Guys account for most of the 3.6mm b/d of below-quota output currently registered by the producer coalition.4 This is a record gap between expected production and actual production from OPEC 2.0, which was registered in August. Chart 3Core OPEC 2.0 Conserves Supplies Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22 Chart 4'Other Guys' Production Keeps Falling Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22 Net, demand will continue to outpace supply in our base case (Chart 5, Table 1). This will require continued inventory draws for the next year or so, as core OPEC 2.0 continues to conserve supplies (Chart 6). Chart 5Demand Continues To Outpace Supply Demand Continues To Outpace Supply Demand Continues To Outpace Supply Chart 6Inventory Will Continue Drawing Inventory Will Continue Drawing Inventory Will Continue Drawing Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23 Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22 Russian Wild Card Battlefield losses in Ukraine are forcing Russia’s military to activate some 300k reserve troops. These losses again are prompting veiled threats to deploy nuclear and perhaps chemical weapons, which drew a sharp warning from US President Biden.5 Further economic losses will begin mounting in a little more than two months, as the first of two major EU oil-import embargoes and a ban on insuring/re-insuring vessels carrying Russian crude and products takes hold. In addition, a US-led G7 price cap on Russian oil purchases will go into effect with the December embargo on seaborne crude imports into the EU.6 We continue to expect Russia will be forced to shut in ~ 2mm b/d of crude oil production by the end of next year – taking output from a little more than 10mm b/d to ~ 8mm b/d.7 Russian’s President Putin already has threatened to cut off oil supplies to anyone abiding by the G7 price cap.8 In our modeling, a unilateral 2mm b/d cut in Russian output – in addition to the lost sales from the EU embargoes and insurance/reinsurance bans – would take Brent prices above $200/bbl (Chart 7). On the downside, a severe global recession that removes 2mm b/d of demand next year could send prices below $60/bbl. Equally plausible cases for either outcome can be made, given current supply-demand fundamentals and the geopolitical backdrop discussed above. This can be seen in the lack of skew in the options markets, which is measured by the difference in out-of-the-money call and put implied volatilities (Chart 8). The skew sits close to zero at present – meaning options buyers are not giving higher odds to a sharp upside or downside move at present.9 Chart 7Higher Brent Prices, Stronger Upside Bias Higher Brent Prices, Stronger Upside Bias Higher Brent Prices, Stronger Upside Bias Chart 8Option Skew Shows Up Or Down Moves Equally Likely Option Skew Shows Up Or Down Moves Equally Likely Option Skew Shows Up Or Down Moves Equally Likely In our modeling and analysis, we continue to believe the balance of risk is to the upside. As can be seen in Chart 6, inventories are below the 2010-14 five-year average – OPEC 2.0’s original target when it was formed – which means KSA and the UAE will be able to respond to any demand shocks that cause unintended inventory accumulation (e.g., the sort that occurred during the COVID-19 pandemic or the OPEC market-share war of 2015-16). Managing the upside risk is more difficult: KSA and the UAE are close to the limits of what they can supply and still carry sufficient spare capacity to meet unexpected production losses. KSA’s crude oil output is just over 11mm b/d, and the UAE’s is at 3.2mm b/d, according to OPEC’s Monthly Oil Market Report. This puts both within 1mm b/d of their max production capacity of 12mm and 4mm b/d. Both got close to producing at these max levels in early 2020, when Russia provoked a market share war; this was quickly reversed as a magnitude of the COVID-19 demand destruction became apparent. The only other large producer outside the OPEC 2.0 coalition capable of increasing and sustaining higher output is the US shales, which are producing at 7.8mm b/d and have pushed total US crude oil output to 12.2mm b/d (Chart 9). Leading producers in the shales have foreclosed any sharp increase in output this year, given tight labor markets and services and equipment markets in the US. Chart 9US Shales Close To Max Output US Shales Close To Max Output US Shales Close To Max Output Investment Implications Global crude oil markets remain tight, with demand continuing to exceed supply. The risk that the economic war pitting the EU and its allies against Russia could expand to a more kinetic confrontation involving additional states is higher, as more Russian troops are called up to serve in Ukraine. If the additional troops do not reverse Russia’s battlefield losses – or if Ukraine looks like it will win this war – Putin likely will feel cornered, and get more desperate.10 We believe Putin will first attempt to impose as much economic pain on the West as possible by cutting off all natural gas and oil flows to the EU and states and firms observing the G7 price cap. However, if that does not force the West to relent on its economic war with Russia, a war with NATO could evolve in which tactical nukes or other weapons of mass destruction are employed. At that point, Putin would have concluded there would be nothing he could do to restore Russia’s standing as a world power. Any plume – nuclear, biological or chemical (NBC) – that crosses a NATO border likely would be treated as an act of war. NATO would have to act at that point. This is not our expectation, nor is it any part of our base case. But it is a higher non-trivial risk than it was last month or last week. This raises the odds of higher war-driven inflation, as well, which will further complicate central-bank monetary policy at a time of war. Our baseline forecast remains intact, with a strong bias to the upside. We remain long the COMT and XOP ETFs to retain exposure to commodities.   Robert P. Ryan  Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Analyst Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Paula Struk Research Associate Commodity & Energy Strategy paula.struk@bcaresearch.com Commodities Round-Up Energy: Bullish In its September update, the US EIA reported natural gas consumption will hit record levels in 2022, increasing by 3.6 Bcf/d to just under 87 Bcf/d on average, led by increases in the electric power residential and commercial sectors (Chart 10). US natural gas consumption in the electric power sector will increase in 2022 due to limitations at coal-fired power plants and weather-driven demand. It is expected to decrease in 4Q22 and in 2023, due to more renewable electricity generation capacity. Natural gas consumption in the residential and commercial sectors for 2023 is expected to be similar as 2022 levels. Base Metals: Bullish According to Eurometaux, a consortium of European metal producers, approximately 50% of the EU’s zinc and aluminum production capacity is offline due to high power prices. More operations are expected to shut as European power prices remain elevated and metal prices drop on recessionary fears (Chart 11). The decision to reopen a smelter following a shutdown is expensive and can result in long wait times. This will make the bloc’s manufacturers heavily reliant on metal imports from other states, which likely will lead to higher pollution from these plants. Aluminum supply is particularly vulnerable to this power crisis since one ton needs an eye-watering 15 megawatt-hours of electricity – enough to power five homes in Germany for a year. Precious Metals: Neutral The Fed’s additional 75-bps rate hike will strengthen the USD and weaken gold prices. Geopolitical risk has been a tailwind for the greenback thus far, as investors rush to the USD instead of the yellow metal for safe-haven investments. If this trend continues, along with further Fed rate increases, the additional risk arising from Putin’s reserve force mobilization and possible expansion of the Ukraine war will boost the USD and leave gold in the doldrums.   Chart 10 Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22 Chart 11 Oil Markets Anxiously Enter 4Q22 Oil Markets Anxiously Enter 4Q22   Footnotes 1     Please see Vladimir Putin mobilises army reserves to support Ukraine invasion, published by ft.com on September 21, 2022. 2     Please see Is a Global Recession Imminent?, published by the World Bank on September 15, 2022.  The report notes, “Policymakers need to stand ready to manage the potential spillovers from globally synchronous withdrawal of policies supporting growth. On the supply-side, they need to put in place measures to ease the constraints that confront labor markets, energy markets, and trade networks.” 3    Please see One hundred years of price change: the Consumer Price Index and the American inflation experience, published by the US Bureau of Labor Statistics in April 2014.  4    Please see OPEC+ supply shortfall now stands at 3.5% of global oil demand, published 20 September 2022 by reuters.com. 5    Please see Biden warns Putin over nuclear, chemical weapons, published by politico.eu on September 17, 2022. 6    Please see EU Russian Oil Embargoes, Higher Prices, which we published on August 18, 2022, for discussion. 7    We include Russia among “The Other Guys” in our balances estimates.  8    Please see Explainer: The G7's price cap on Russian oil begins to take shape, published by reuters.com on September 19, 2022. 9    We use the standard measure of skew – i.e., the difference between 25-delta calls and puts – to determine whether option market participants are discounting a higher likelihood of an up or down move, respectively. 10   Please see CIA director warns Putin's 'desperation' over Russia's failures in Ukraine could lead him to use nukes, published by businessinsider.com on April 15, 2022. Investment Views and Themes Strategic Recommendations Trades Closed in 2022