By Geoffrey Smith 

Investing.com — U.S. President Joe Biden will warn China’s Xi Jinping that the U.S. will retaliate against it if it provides active support to Russia’s invasion of Ukraine. Xi, meanwhile, signalled a subtle shift in China’s Covid-19 policy to alleviate the stress on China’s economy. Russia avoids default – at least for now – but oil rises further on fears that it intends to escalate the war. GameStop (NYSE:GME) shares stumble after a surprise loss over the holiday quarter. Here’s what you need to know in financial markets on Friday, 18th March.

1. Biden – Xi talks

U.S. President Joe Biden will talk with his Chinese counterpart Xi Jinping, and will warn him that China will face “costs” if its verbal support of Russia over Ukraine morphs into more substantial help, according to Secretary of State Anthony Blinken.

According to various reports, the U.S. is determined to stop China undermining Western sanctions against the country and to deter it from sending the military assistance that it says the Kremlin has asked for. Russia denies that it has asked for help.

China – like India – abstained from the UN motion two weeks ago condemning Russia’s invasion, and official media have largely followed the Russian line in blaming U.S.-led expansion of NATO for triggering the conflict. Chinese officials have repeatedly expressed concern about the damage to the world economy from the sanctions imposed by the U.S., EU and allies since the invasion. 

Federal Reserve officials Michelle Bowman, Charles Evans and Tom Barkin are all due to speak later, giving their take on the events of earlier in the week.

2. Russia avoids default for now

The sanctions on Russia may not actually be as tight as advertised. Reports suggest that Russia has serviced its international debt payments, using central bank reserves that were supposed to be frozen under the measures announced two weeks ago.

Newswire reports said that bondholders had started to receive payments in respect of interest totalling $117 million, avoiding what would have been a momentous default that would have sent shockwaves through the emerging market debt universe.

Bloomberg reported that various leading Russian companies, such as Norilsk Nickel (OTC:NILSY) and Severstal (LON:0SJQ), have also serviced their foreign debt obligations. Russia’s central bank will hold a regular policy meeting later, and Governor Elvira Nabiullina, who was earlier re-nominated for another term by President Vladimir Putin, is likely to be asked about both this week’s payments and future ones.

3. Stocks set to open lower; Boeing-Delta deal in focus

U.S. stock markets are set to open lower later but still in the green for the week after two days of solid gains since the Federal Reserve raised U.S. interest rates for the first time in over three years.

By 6:15 AM ET (1015 GMT), Dow Jones futures were down 187 points or 0.5%, while S&P 500 futures were down 0.6% and Nasdaq 100 futures were down 0.7%. The three indices had all risen by over 1% on Thursday, after even bigger gains immediately after the Fed decision on Wednesday.

Stocks likely to be in focus later include Boeing (NYSE:BA), which was reported by Reuters to be in advanced talks with Delta Air Lines (NYSE:DAL) over an order for around 100 of its 737 MAX 10 aircraft. FedEx (NYSE:FDX) will be in the spotlight after its earnings spoke of increasing cost pressures, while GameStop’s turnaround again looks in doubt after it posted a surprise loss during the holiday quarter.

4. Xi signals shift in Covid policy 

Chinese President Xi Jinping signalled a shift in the country’s ‘zero-tolerance’ policy to Covid, bolstering hopes that the country will come to terms with a virus that has become too hard to suppress entirely.

China will “strive to achieve the maximum prevention and control effect at the least cost and minimize the impact of the epidemic on economic and social development,” Bloomberg reported Xi as telling a Politburo standing committee meeting on Thursday.  

The lockdowns in Shenzhen and Jilin over the last two weeks have not been as severe as those seen in 2020, although they have been enough to lead to widespread factory closures.  Shenzhen, a major manufacturing hub, is set to loosen its restrictions soon, local authorities said on Thursday, but gave no precise timetable. 

Hong Kong, meanwhile, continues to suffer one of the highest death rates seen anywhere in the world over the last two rates, as a combination of low vaccination rates and high population density takes its toll. 

In Europe, Germany is also set to drop most of its Covid restrictions from Monday, despite a continued run of high infections.

5. Oil pushes higher on Ukraine escalation fears

Crude oil prices drifted higher again on Friday as fears of further escalation to the war in Ukraine predominated. U.S. officials have warned that, after suffering repeated battlefield setbacks, Russia may be preparing to use chemical weapons to increase the pressure on Ukrainian President Volodymyr Zelensky to accept its demands.

By 6:30 AM ET, U.S. crude futures were up 1.3% at $104.35 a barrel, while Brent futures were up 1.3% at $107.97 a barrel.

Fears that Western sanctions could lead to a sudden stop of Russian export appear to be misplaced, however. India has quadrupled its imports of Russian oil this month to some 360,000 barrels a day, according to Kpler data cited by the Financial Times.

Baker Hughes’ rig count and the CFTC’s positioning data round off the week later.