Do you want to know what will drive financial markets this week? The Insider View is an expert analysis of the key factors that are influencing institutional trading.
Week Commencing 27 September 2021
German Election - time for the horse-trading
Germany’s election was as expected inconclusive and the deal-making in Berlin will eventually result in a coalition Government that is likely to have a greater representation from the Social Democrats and the Greens. The common thread that brings the parties together may well be the call for greater stimulus and borrowing. This will certainly put pressure on the ECB not to end the current stimulus and not to increase interest rates.
The Fed’s announcements last week suggest an end to stimulus insight and an eventual tapering rate rise. The dollar would in these circumstances rise against the Euro and we could see a significant fall in the EURUSD over the next 6 months.
A lack of HGV drivers is a problem across Europe but Britain is at the moment most affected by this shortage. Haulers have historically paid drivers poorly and Brexit has encouraged many foreign drivers to go home, add that to DVLA department strikes, slow work from home policies and government inaction means many drivers have not had their licenses issued or renewed. This has led to shortages of goods on shelves and petrol on forecourts. The only inevitable result of this will be much higher inflation figures across all goods. And these rises won’t be “transitory.” They will be here for good. Get ready for a big inflation rise.
Gas prices across Europe have not stabilized. UK consumers will be protected from massive tariffs until next Spring when the upper limit set by the Government is due to be revised. Prices will have to rise very significantly or the Government will have to bail out every energy company in the country. Industry is already having to pay much higher tariffs; these higher prices will be passed on to consumers.
Right now there is not enough Gas stored in the UK to last the winter and it's proving to be very difficult to book the deliveries that are required. When gas gets low there will be power cuts as electricity generation is reduced.
Britain looks like it’s setting up for a massive winter of discontent. Boris…?
Will Gas prices drive inflation?
This week the economic calendar is dominated by the Fed’s meeting on Tuesday and Wednesday the rate decision and press conference. Bond and rates markets have been pretty hawkish and this has seen the US Dollar push higher. The largest currency in the DXY Index EURUSD dropped by 0.71%. Dollar strength was evident elsewhere: GBPUSD fell -0.69%, AUDUSD -1.18% and USDCAD added 0.65%.
Net-long US Dollar positioning (CFTC’s COT) is holding near its highest level since November 2019.
The recent rise in inflation may have reduced slightly but this may be temporary as the significant rises in Gas prices (particularly in Europe) is likely to push producer prices up across the board. Further inflation now looks inevitable and index markets have declined accordingly. It's possible that we will see a further decline in index markets early in the week as investors position themselves for a Hawkish Fed and a decline in liquidity causing a further decline in stocks.
The German election next weekend will not produce a clear winner and Angela Merkel will remain as a caretaker until a new coalition is formed. This could take some months. A center-left coalition broadly in favor of fiscal stimulus is likely and this may put pressure on the Euro to fall.
Evergrande - A Chinese House of cards?
Evergrande is the biggest property developer in China and has a massive monopoly. Over the last few years Evergrande bonds, which are mainly sold to overseas investors, pension funds, and institutions, feature in nearly every major investment portfolio across the world.
Evergrande is in trouble and so far the Chinese Government has not stepped in to help. The value of their bonds has plummeted. The knock-on effect has required funds to raise cash. This has resulted in falls on index markets around the world. If the Chinese Government don't step in things could get a lot worse.
The Insider View is produced in collaboration with Markets.com and Trade Room Plus for The Power Hour.
More on Natural Gas
Natural Gas is an important source of energy across Europe and the UK. It's used a lot in industry and in particular its used the production of Fertilizer and the by product of this is CO2 which is then used in the food packaging industry. The current cost of Gas has forced the fertilizer manufacturers to stop producing new fertilizer and this mean no new CO2 for the food industry. Fertilizer products have become very expensive and this will mean higher food producer costs in the future.
The food industry is unable to pack fresh meat and meat is being frozen instead. There will be wastage and higher costs. The manufacturers do not have the freezing capacity and nor do the food distributors. Food prices will inevitably rise. There is a real chance of meat food shortages heading into Christmas.
Not enough Gas for home central heating sytems is currently being stored in the UK to last the Winter. More Gas needs to be purchased and imported into the UK but its a competitive market at very high prices and Russia is holding back supply. Inveitably Russia will earn significantly more money from its Gas and will benefit in political terms if they reduce the pressure that will envitably be put on European governments.
UK gas consumers are protected from these massive price rises by a consumer price cap and right now the Gas companies are all selling the Gas to consumers far cheaper than they can buy it. Small Gas companies are shutting down and the big ones don't want to supply to these consumers at this cap price - it will just lose them lots of money. If Gas prices stay high then the Government will have a big and very costly political problem to solve.
There is a real chance of an energy crisis hitting the UK in the coming months. A cold winter could see a need for rationing of Gas. An energy crisis is never good news for the standing government.