Carrots, Sticks, and Free Trade Talks and Banking on Uninsured Deposits

🥕 Carrots, Sticks, and Free Trade Talks

Incentives offered by the US Inflation Reduction Act (IRA) are the ‘carrots’ executives think are too good to miss. At this week’s CERAWeek energy conference, Europe’s policies were more frequently equated to ‘sticks’. 

The IRA’s subsidies are already directing new investments in American renewables – the headlines of which are dominated by EV manufacturers moving critical pieces of their supply chain to the US. 

The EU, South Korea, Japan, and other tech-heavy regions haven’t been quiet about their fears over the IRA’s allure. A mass exodus of skilled labor, investments, and innovation is on the table. 

As far as technology companies are concerned, these countries should take note and offer similar incentives to diversify supply chains. The complicated policies that regulate companies, i.e., the ‘sticks’, are a stark contrast to the simplicity created by the IRA. 

This week’s announcement from Exxon harps on the Europe/stick narrative. The company plans to review its investments in Europe in response to the EU’s ‘windfall tax,’ enacted after surging energy prices floated oil and gas profits to record levels.

After this week’s EU-US visit between President Biden and European Commission President Ursula von der Leyen, Europe appears poised to get in on at least a fraction of the IRA’s incentives by creating a ‘free-trade’-like status for EU-sourced battery minerals. Europe’s raw battery minerals would be eligible for roughly half of every electric vehicle’s $7,500 tax credit if fruitful. 

🏦 Banking On Uninsured Deposits

Silicon Valley Bank’s (SVB’s) cataclysmic week is spilling concerns about uninsured deposits and rising interest rates over the banking industry. In SVB’s case, interest rates are at the heart of the beginning and the end. 

The Fed’s interest rate hikes have stifled investing activity, leading to decreased deposits and more clients withdrawing their funds entirely. To buffer against these lost deposits, SVB attempted to sell its $21 billion bond portfolio dominated by U.S. Treasury bonds – another investment vehicle taking a beating with high interest rates. The bank lost ~$1.8 billion on the sale, and clients pulled money out precipitously.

Rising interest rates aren’t isolated to the US, so banks worldwide are weary of downstream bank runs. Likewise, companies with considerable uninsured deposits are concerned the crisis will leave them without resources to cover payroll.  

As of the end of 2022, 89% of SVB’s $175 billion in deposits were uninsured, so companies are only guaranteed the FDIC’s max payout of $250,000 if the FDIC can’t find a deal to safeguard deposits.

Quick Shots:

🍁 Sorry, Not Sorry: Canada Cuts Russian Metals

Canada banned Russian aluminum and steel product imports on Friday, coinciding with the start date of the US’ new 200% tariff on Russian aluminum products. In 2021, Canada imported ~$32 million (C$45mm) and $154 million (C$213mm) of aluminum and steel from Russia, respectively. For context, Canada imported roughly 113,000 metric tons of steel from Russia in 2021, amounting to ~1.6% of the country’s total steel imports of 7 million metric tons. 

📉 Embargoes Erode Dollar Strength

The US dollar’s dominance in international trade is at odds with embargoes levied against Russia. In response to the EU/G7/US sanctions against seaborne deliveries of Russian crude and oil products, Russia and its customers see few reasons to transact with the long-standing dollar. 

India is the perfect example. The country stepped in to fill the sizeable hole left in Russia’s pockets when Europe, its historically dominant importer, turned away. Now, India is sourcing Russian crude at favorable rates and paying for cargo in non-dollar currencies, including the Russian rouble and UAE dirham. 

⚡ EU Trims Consumption

On Friday, officials finalized a deal to trim the EU’s energy consumption by 11.7% by 2030, short of the original target of 13% set by the European Commission in 2022. The legally binding policy places extra weight on energy efficiency, with officials at the meeting targeting old buildings as a primary culprit.