Europe’s energy crisis is worsening – could it trigger a recession?
In the latest edition of Market Week in Review, Paul Eitelman, Chief Investment Strategist for North America, and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the energy crisis in Europe. They also reviewed the market’s reaction to the situation, as well as the latest steps taken by the world’s central banks to curb inflation.
Russia halts gas deliveries to Europe, raising fears of recession
Antal-Gilbert opened the conversation by noting that the European energy crisis has intensified in recent days, following Russia’s decision on September 2 to indefinitely cut off all natural gas flows to Europe – via the North Gas Pipeline. Stream 1. Given Europe’s dependence on Russian gas, Eitelman called the news quite consequential for the region, pointing out that the reduction in gas supply has already led to a large surge. prices.
“In 2020, natural gas prices were trading around €20 per megawatt hour – and now prices are north of €200 per megawatt hour,” he noted. Eitelman added that while European countries have done a pretty good job of storing gas supplies ahead of the cold months, it’s unclear if the region will be able to get through the coming winter without a big enough ration.
The energy crisis is also likely to put constraints on European economic growth, with businesses and consumers constrained by rising prices, he said. Because of this, the possibility of a recession in Europe later this year has become a baseline scenario in the minds of many analysts, Eitelman said, including the strategy team at Russell Investments.
However, Eitelman warned that the overall situation remains very fluid, with many European governments stepping up efforts to cushion the blow from high energy prices by unveiling fiscal support packages. For example, in the UK, newly appointed Prime Minister Liz Truss recently announced a package worth around 6% of the country’s GDP that will effectively cap energy prices for consumers and businesses, he said. .
“Under this plan, the UK government would absorb energy costs above a certain level, in the form of higher deficits and more borrowing,” Eitelman said, calling the plan a security hedge. important for the UK. He added that similar programs could be implemented in other European countries in the weeks and months to come.
How are the markets reacting to the European energy crisis?
Expanding the discussion to global markets, Antal-Gilbert asked Eitelman how markets have reacted to the energy crisis in Europe. Eitelman said that overall, equity markets have actually been quite resilient to the latest developments, with few big moves. On the fixed income side, however, there has been more pressure, he said, with sovereign bond yields climbing around the world.
As evidence, Eitelman cited the yield on the benchmark 10-year U.S. Treasury, which rose about 10 basis points the week of Sept. 5, climbing to around 3.3% at the market close on Sept. 8. . crisis is contributing to high global inflation, especially in Europe, and that’s not good for bond investors,” he noted.
Eitelman said globally, central banks continue to respond to the highest levels of inflation in decades with aggressive rate hikes. The European Central Bank and the Bank of Canada raised rates by 75 basis points the week of September 5, with most investors expecting the US Federal Reserve to do the same at its policy meeting later this month. here, he said.
“It’s becoming almost fashionable among central bankers to raise rates by 75 basis points now,” Eitelman remarked, noting that such giant-sized rate increases were almost unheard of in history. He concluded the segment by noting that overall, the upward trend in yields in fixed income markets is likely to continue in the near term.
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