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How conflict in Ukraine may impact energy prices, supply chains, and semiconductors

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Tematica Research Chief Macro Strategist Lenore Hawkins joins Yahoo Finance Live to discuss how the escalating Russia-Ukraine conflict may affect the energy market, supply chains, and semiconductors.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: Full blown crisis between Russia and the rest of the world if Putin invades Ukraine, could do some damage to the global economy to say the very least. How much damage precisely, though. For more on this joining us now is, Lenore Hawkins, Chief Macros Strategist at Tematica Research. Lenore, always nice to see you here. So you are based in Italy. Give us the European mood on the ground right now as the situation develops.

- So what's really interesting about this is that this coming at a time where we're already dealing with a bit of an energy crisis. For example, my heating bill alone in my home in Italy is up about 30%, and that's at a time where, for example, Italy had got hit a lot harder by the pandemic.

I think Americans can't really appreciate how hard the economy got hit here where we were locked down completely for months. And even now, it's loosening up, but the number of restaurants and retail establishments that got hit hard are profound. And then you've got all these higher costs for energy, the supply chain problems, and now we've got this, which is an even bigger headwind when it comes to energy and supply chains.

I mean, I'm not sure if everyone's aware of this, but the natural gas from Russia accounts for about all of 1/3 of what's used in Europe. And for oil, for crude, it's a little over 1/3. So getting into a rumble with Russia and Ukraine really is going to hurt Europe in a way that not hitting the US as directly.

Europe is also facing problems with food. For example, Russia and Ukraine together account for about 20% of global corn exports and 25% of wheat. Russia's the world's largest wheat supplier. So as these sanctions take hold and if Russia decides it wants to push back, it's going to have an impact.

JULIE HYMAN: You know, and this is at a time when Europe is really starting to see. It's a little bit behind the US, if you will, on inflation starting to ramp up, so one would think that's going to hasten things along there. So from an investment perspective, how are you thinking about it, in particular that that potential commodity shock in Europe?

LENORE HAWKINS: Right. So the supply chains are a really big problem. And particularly as an investor, one to keep in mind is there's a very big problem with semiconductors. So the Ukraine actually is responsible for about 70% of xenon. And so, it's a major supplier of raw material, gases, including neon, argon, Krypton, xenon. And it supplies about 70% of the world's neon gas capacity.

And while the proportion of neon gas that's used in semiconductors is not as high as in other industries, it's still absolutely vital to produce semiconductors. So if the supply of that material is cut off, oh. And it isn't like semiconductors have been going so well. And then that trickles down affecting, as we know a big problem for the auto industry.

But also, what we're doing right now. All the computers, those are going to get hit hard if that xenon, which I think is going to put pressure to start finding these natural resources elsewhere. And also what we were talking about with energy costs, and an interesting place, I think, for investors to look is actually at nuclear power because nuclear power got a really bad rap after what happened in Japan, but this move to cleaner energy is really hurting Europe.

Our energy costs keep going up because we're trying to do to go greener, which everybody wants that. But the shift is expensive. Now, we're facing potential political crisis with energy. That can make this nuclear power look a lot more interesting. And for investors, that means things like looking at uranium.

BRIAN SOZZI: Lenore, you said you're heating oil, your heating costs for your home have gone up 30%. Now, humor us here, what are you paying for a tank of gas right now in Italy? Because gas prices here in the US are rising here before this really hits crisis level. I mean, do you think this is the type of situation where these higher gas prices globally could tip us all into a global recession?

LENORE HAWKINS: Well, historically, yes. When you've got an economy that's already starting to slow. And let's face facts, with the inflation that we've been dealing with the household income is actually contracting. Like, real income is contracting. Then you've got these war of the wallet is going to just pay for I must have, things like food and filling up the car, rather than the I want to have.

We've had that huge cut in fiscal spending that's about 4% cut to GDP. We're no longer sending out those checks that were really helping people struggling. And now, this, and this could only make things a lot more expensive. And that's the kind of thing. And then we're looking at the Fed, potentially, raising rates in this environment. And I'll point out that never before have we really seen the Fed going to raise rates when the Russell 2000, the Dow, the S&P, and the NASDAQ are all below their 200-day moving averages. It's a new time.

JULIE HYMAN: Yeah. I mean and we just heard Greg saying that this whole situation means that the Fed is less likely to raise by 50 basis points when it begins raising. Does that feel accurate to you? I mean, on the one hand, as you say, markets are getting beat up a little bit, we have concern about all of what's going on. On the other hand, you have prices going up, which the Fed has a mandate to fight against.

LENORE HAWKINS: Yes. But I think we have to ask why those prices have been going up. And if we just blanket it, I hate the word "inflation" because it's used so broadly. If we look at what's really driving those prices and we look at where those are trending, if we exclude-- obviously, right now we've got a problem with the energy. But prices are actually starting to roll over a bit.

And with the household wallet really constrained, this Fed tightening is more likely to just be a hard, hard hit on asset prices at a time where we desperately need the stock market to keep going up because that's where that extra spending has really been coming from, given that the household income's not going so well. And that can easily tip us over into a recession. I would not be surprised to see the Fed hike a lot less than people are expecting. And the bond market is telling us that, anyways, that it's not going to be nearly this dramatic increase.

BRIAN SOZZI: Well, let's just hope those prices for a Krypton and neon come down because I'm tired of paying so much for my electrical gadgets. I've just had enough of it. Lenore Hawkins, stay safe. Talk to you soon.