International markets are concerned about energy sufficiency in Europe

With the main international markets having their eyes on July 22 when the smooth restoration of natural gas supplies from Russia to Europe is judged, to a large extent, this date may turn out to be the most important of the year. At least this is what Deutsche Bank estimates in its relevant analysis.

According to a survey of international analysts, if the negative scenario of this case is verified, a decline in European share prices is expected. Southern European spreads will rise to early 2020 levels, the euro will sink to 90 cents and a major recession will grip Europe. The biggest “bears”, on the other hand, estimate that the index – barometer of the American markets, S&P 500, may fall even up to 20%.

At the same time, warnings of recession are increasing. The chance that the global economy will plunge into recession is approaching 50% as central banks tighten monetary policy and demand for goods weakens, Citigroup notes.

Investor sentiment remains under pressure, with the war in Ukraine showing no sign of abating and inflationary pressures persisting, forcing central banks around the world to aggressively raise interest rates, fueling concerns of a serious slowdown or even recession. global economy.

Big shock to the profits of companies internationally, a development that has not been appreciated by the stock markets, Goldman Sachs estimates.

Morgan Stanley warned that many US companies will suffer as their international operations become less profitable due to a stronger dollar, forcing many of them to revise down their earnings forecasts and see their shares fall.

Euro-dollar

The strengthening of the dollar brought the euro to a 20-year low and to absolute 1:1 parity with the US currency, while a year ago the euro was worth $1.18. It is noted that since the beginning of the year, the euro has lost more than 12% against the American currency. The index, which tracks the value of the dollar against six major foreign currencies, has strengthened by 16% in the past year, a historic rally, as analysts at Morgan Stanley called it.

There are two main factors driving the euro lower.

First, interest rate differentials with the US have continued to widen as the outlook for economic growth, and hence for tighter monetary policy, in the US and Europe diverges. The Eurozone appears headed for recession, while the US economy continues to hold up better.

The Fed has already raised its key interest rate three times, ranging from 1.5% to 1.75%, while the ECB is expected to make the first increase on July 21, with its key lending rate currently at zero and the deposit acceptance rate is negative (-0.50%).

Expected more aggressive interest rate policy from the FED after inflation rose 9.1% in June to a 41-year high further widens the Eurozone’s gap with the United States. But with the increase in interest rates by the ECB, some reaction of the euro is also expected.

Goldman Sachs estimates that the euro will recover to $1.05 in the next quarter and $1.15 in the next 12 months.

On the contrary, Citigroup sees the euro at $0.97 in the next quarter, although it estimates that the fair price of the European currency is in the zone of $1.06-1.10.

ING believes that the chances of a break below the parity are higher than a major recovery in EUR/USD and a further technical decline to the 0.9800-0.9900 range is likely.

According to UBS, the dollar’s rally will not last, while it considers the Swiss franc as a safer haven.

Oil – Natural gas

Developments in the oil market today have been compared to the energy crises of the 1970s – the rise in prices following the OPEC oil embargo in 1973-74 and the further rise in prices during the Iran-Iraq War in 1980. Both two crises plunged the economy into recession and were accompanied by high inflation and historically high interest rates.

During the global financial crisis of 2008, the price of Brent fell from 140 dollars in July 2008 to 40 dollars per barrel at the end of the same year.

Goldman Sachs predicts a rise in the price of Brent oil to $140 per barrel in the next quarter, and in 12 months it estimates that its price will reach $130 per barrel.

On the contrary, Citigroup estimates that it may fall to 60 dollars(!) per barrel. Assuming that the global economy will go into recession, while giving an even more impressive prediction of oil falling to $40 in 2023.

Rising US interest rates are pushing the dollar higher against the euro and other major currencies, holding down crude prices. Oil is priced in dollars and consequently becomes more expensive for consumers who have to pay in other currencies, reducing its demand.

In two weeks, some European governments may have to activate emergency gas rationing plans if Russian gas supplies are not restored, Citigroup points out, and the price of natural gas could climb as high as €250/MWh.

In the event that Russia permanently cuts off natural gas supplies, Goldman Sachs estimates that energy costs will jump by around 65% compared to today (300% compared to the summer of 2020) when the price of a megawatt hour is already skyrocketing .

Bonds

In the first half of 2022, losses on 10-year US Treasuries hit 13%, the worst first-half performance since 1788(!), as concerns intensify that high inflation is here to stay and rate hikes will be much larger than originally estimated. Losses of 22% were recorded for German bonds and 25% for Italian bonds.

JP Morgan recommends long positions in German 5-year bonds vs. US bonds, underweight positions in the periphery via short Italian 10-year bonds vs. German 10-year bonds and long positions in Belgian 30-year bonds vs. French, long Austrian 10-year bonds vs. French as well, and short positions in 15-year Portuguese versus Spanish bonds.

Goldman estimates that the yield on German 10-year bonds is expected to rise to 1.91% next quarter and 2% over the 12-month period, but the overall return for investors will fall further due to lower prices.

Gold – Commodities

It disappoints its fans of the “yellow metal” with their price fixed at the level of 1,710 dollars. Usually in periods of high inflation it shows its brilliance.

But a strong dollar and concerns about rising interest rates continue to weigh on the precious metal, with gold unable to benefit from investors’ continued aversion to risk-on positions.

According to analysts, gold prices could temporarily fall below the $1,700 level and then receive strong support around $1,670.

However, Goldman Sachs predicts a big rise in the price of gold by 20.3% in the next quarter to $2,100 an ounce and by 43.2% in 12 months to $2,500.

Commodity prices are showing a recession, many analysts say, and note that this fact is reminiscent of the course of the financial crisis of 2008. The prices of copper or nickel, for example, have fallen by 20 to 40 percent since May. And while the rest of the markets were experiencing an endless descent, that of the commodities was galloping with “driver” the energy. It was the strongest rally for commodities since World War I. The CRB Commodities index has gained 30% since the beginning of the year.

RES-EMP

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