Market news and our thoughts on gas prices.
Market News
Chinese markets slid – Hang Seng (-1.8%); Shanghai Composite (-0.3%) – on concern over the health of the nation’s $2.9tn trust industry. Three firms said late last week they failed to receive payments linked to Zhongzhi, one of China’s largest wealth managers with about $138bn in AUM. Two clients at another wealth fund said their payments were delayed. That’s on top of jitters about the mounting debt issues in the real estate market.
Elsewhere in Asia, the Nikkei 225 also fell (-1.3%), while the yen steadied after briefly weakening below the 145 per dollar level, a zone that last year saw Japanese authorities intervene in the market. The S&P futures are currently predicting an unchanged market at the open this afternoon. The FTSE 100 is currently trading 0.3% lower at 7,503.
The 10-year Treasury yield has moved up to 4.17%, while gold has fallen back to $1,911 an ounce. Sterling $1.2686 and €1.1587. After seven weekly gains in a row, Brent Crude slipped to $86 a barrel amid China concerns.
Unmoved by recent signs that inflation pressure is abating, economists continue to predict the ECB will deliver one final 25-bp increase in interest rates next month. But a survey also showed they expect rate cuts to start in March, a month earlier than previously thought. In the US, Goldman expects the Fed to start lowering interest rates by the end of June 2024, with a gradual, quarterly pace of reductions from that point.
The bad news keeps on coming for Britain’s rental market as a rise in tax proceeds from property disposals hints at a bigger-than-expected sell-off by the nation’s landlords. The number sold rose to 25k between April and May from 22k in February and March, according to calculations by Savills based on tax receipts. And HMRC revised up the 2021/22 tax year disposal figures by 8.5%, suggesting landlords were offloading property earlier than first thought.
Source: Bloomberg
Commodity View – European Natural Gas Prices
Last week, gas prices were back in the news in Europe. The FT wrote. “European natural gas prices surged almost 40 per cent on Wednesday as the potential for disrupted global liquefied natural gas supply from Australia spooked traders betting on further price declines. Prices on the Title Transfer Facility (TTF), the European benchmark, rose to more than €43 per megawatt hour, up from almost €30 on Tuesday, reaching its highest point since mid-June. The increase was triggered by reports that workers at important LNG plants in Australia were planning strike action in a fight for higher pay and better job security, with market movements exacerbated by some traders closing out bets that gas prices would fall.”
https://www.ft.com/content/8b7609dc-9d51-48b6-b608-cbff3a9c1658
€43 is a far cry from the €300 spike that we experienced a year ago. Nevertheless, despite the relative calm this year, the potential for further disruption has not gone away, and the longer-term implications have yet to be felt.
TTF Natural Gas 1-Month Index
Source: Bloomberg
However, despite the relative recent calm, the fact that the EU needs to import liquified natural gas (LNG) from the other side of the world tells us that the full consequences of the shock have yet to be felt. Firstly, Europe was saved in no small part because the previous winter was the second warmest on record. There is no guarantee we will be so lucky this time. Secondly, if Europe broadly, and Germany in particular, can no longer rely on cheap Russian gas on its doorstep then its whole economic model is under threat.
The article linked below in Politico highlights the recent decision by German chemical giant BASF to make a new $10bn investment in a new state of the facility in China. This is in addition to the closure of several major assets at its flagship site in Ludwigshafen, Germany due to high production costs.
https://www.politico.eu/article/rust-belt-on-the-rhine-the-deindustrialization-of-germany/
The trepidation that was palpable in Europe as we entered last winter has been replaced by a complacency that has the potential to deliver surprises on the other side of the distribution.