Shenzhen's lockdown has a major impact on tech supply chains
And China and the US meet to talk through Russia's invasion of Ukraine
March 14th, 2022
The Market remains rocky as it grapples with multiple headwinds concerning inflation, Russia, and China.
For the day, all major indices were down:
The S&P 500 fell -0.74%
The NASDAQ Composite plunged -2.04%
The DOW was flat at +0.01%
The RUSSELL 2000 dropped -1.92%
Here are today's major Market drivers:
1. Covid could disrupt supply chains in China
Cases, while still low, are doubling rapidly in China, which has long sought a zero-covid policy through complete shutdowns of afflicted areas. News of China's COVID-19 lockdown of Shenzhen, a city of 17.5 million people, has put supply chains on high alert for tech companies.
Why does this matter?
Large American tech companies that rely on Shenzhen's manufacturing prowess could see their orders delayed, worsening supply chain problems. As a city, Shenzhen has roughly the same GDP as Switzerland. Apple, which has most of its assembly located in Shenzhen, dropped on news of a suspension of operations at Foxconn, its primary manufacturing partner.
2. Oil could see decreased demand due to China's lockdown
Oil dropped 7% from last week's highs but remains volatile on geopolitical news that Russia and Ukraine are continuing talks towards a cease-fire. Additionally, reports of rising COVID-19 cases in China have put the Energy Markets on high alert.
Why does this matter?
As a commodity, oil is subject to future global supply and demand. A cease-fire in Ukraine could start the long process of re-establishing Russian oil supply output. China's lockdowns, on the other hand, could dampen oil demand.
If both events happen, then oil prices could drop a little. But current supply and demand for crude oil remain largely out of balance, which means it will take a while for prices to come down meaningfully.
3. China and the US both want Russia's invasion of Ukraine to end, but they both want to come out on top
China and the US met in Rome, Italy, in a high-stakes meeting to discuss a host of contentious issues. US and China are both seeking to normalize relations to deescalate the situation in Ukraine.
News that Russia has asked China for military support, a report that the Chinese government emphatically denies, also complicates the situation.
Why does this matter?
China and the US have had a rocky relationship over the past five years. But both countries have the incentives to stabilize the geopolitical fall out of Russia's invasion of Ukraine. The two countries are among each other's largest trade partners, and the global economy is roiling from the conflict.
US-listed Chinese companies have plunged so far this year
While the countries are at odds with how the conflict could end, the US has the advantage of threatening to delist Chinese companies from the US for failing to comply with US accounting standards.
In coincidental timing, the Securities and Exchange Commission named five Chinese companies that it could force to delist on Friday. Chinese companies listed in the US plunged on Friday and today as a result.
Further Reading:
Reuters: Sullivan meets China's Yang, with U.S. warning of perils of aiding Russia
CNBC: Apple supplier Foxconn pauses production in Shenzhen because of Covid outbreak