Winter’s coming. We don’t want to call the end of the summer this early, but today’s financial media reports leave us no choice. There’s a massive energy crunch going on in Europe and it’s triggering concerns it may not be able to refill gas storage sites ahead of the winter months. At the basis is very strong demand but extremely tight gas supplies. Russia as a key exporter is keeping a lid on European flows for … reasons. It did say that a quick start of the Nord Stream 2 link from Russia to Germany would ease the current crisis *wink*. At the same time, heavily-fought-for US production/export of liquified natural gas (LNG) is severely strained by tropical storm Nicholas. Record gas prices in turn fuels electricity prices. “Surely we have some alternatives or backup capacity?” Well, we could resort to coal production sites, but that’s going to cost. Carbon emission rights have surged in Europe as part of the greenification, making fossil fuels very expensive to use it as an electricity production source. So in the end, upward price pressures would remain. “Thank god we invested in and can rely on this green energy then, right?” About that … wind at the North Sea isn’t particularly blowing lately. And specifically for the UK, it just got even worse after a major power cable bringing electricity from France to the UK was shut down by a fire in a converter station (see below). The energy crisis already prompted several European countries (Spain, Italy, France, Belgium …) to take action by capping prices and/or extending/introducing price discounts. The intention is clear: safeguard consumer’s purchasing power so as to not to thwart the economic recovery. Energy commodities are obviously flying sky-high today, with natural gas leading. Future prices at some point jumped 17% before paring some of the gains to 10%. Oil prices gain 2% with Brent having the $75 target in its crosshairs. This in turn supports the likes of the CAD but especially the NOK. EUR/NOK slips to 10.14, the lowest level since early July. Given the boom on commodity markets, the dollar holds up fairly well. A poor risk appetite (equities ease half a percent in Europe, flat on WS) provides some counterweight. The greenback marginally loses ground vs the likes of the euro (1.1817) or the pound (1.383). It is no match for the JPY though. USD/JPY slips to 109.24. Core bond yields trade volatile. The US curve currently bull flattens with long tenors down 1.6 bps. The German Bund underperforms. Yield changes vary from 1.5 bps (10y) to 2 bps (30y).
UK day-ahead electricity prices jumped today jumped 19% to a near record high as a fire halted a key power link between France and Britain. According to the UK grid operator, the cable might be out for at least a month. The outage also caused a similar 18% jump in UK gas price futures. The incident comes as UK gas and electricity prices were already propelled by different supply bottlenecks, a trend that is also at work in other European countries.
According to a Bloomberg citing sources familiar with the matter, Chinese authorities told lenders of Chinese developer Evergrande Group won’t be able to pay debt obligations due on September 20. As the developer has more than $300bln of liabilities, a default of the group could affect not only banks, but also suppliers, homebuyers and (retail) investors. As such it not only contains risks to financial stability. A disorder default also could cause issues of social unrest which Chinese authorities will probably try to avoid.
Headline inflation in Canada in August rose 0.2% M/M and 4.1% Y/Y (from 3.7%). The rise was faster than expected and marks the highest reading since 2003. In a monthly perspective, the rise was mainly driven by costs related to transportation. Also prices of shelter and consumer durables remain upwardly oriented. At same time indicators of core inflation remained more modest (ex food and energy 3.0% Y/Y, core common 1.8% Y/Y). The Bank of Canada wants to keep inflation in a 1%-3.0% corridor. However, today’s (core) inflation data probably will be seen as supporting the view that at least a big part of the rise in inflation might be temporary. The loonie only gains marginally in the wake of the CPI release with USD/CAD trading 1.2675.