Weekend Bite, a Seeking Alpha original series: This week we’re joined by Katie Stockton, Founder and Managing Partner at Fairlead Strategies, to dive into what the technicals are telling her about where U.S. markets are heading from here. We also explore the Fairlead Tactical Sector ETF (TACK), while Kim Khan covers next week’s potential market-moving events in Catalyst Watch.
European energy ministers are convening in Brussels today as a deepening energy crisis confounds the bloc. Set to be discussed are a series of emergency intervention measures to stave off runaway prices, or more painful cuts that could result in de-industrialization and even social unrest. While ministers will debate the effectiveness of the actions, and their related consequences, a bigger part of the equation will be to maintain a consensus and preserve the unity of the European Union. Here is what’s on the table:
Government support: Looking to prevent ballooning collateral requirements, emergency credit lines would be offered to energy market participants that are facing high margin calls.
Rationing: Proposals range from setting mandatory targets on reducing electricity consumption during peak hours to cutbacks in electricity utilization.
Price caps: The most controversial of the measures is putting a price ceiling on gas imported from Russia, and how the caps would impact different regions and countries.
Trading suspensions: Caps may also be imposed on the margin limits that energy exchanges can ask for, or other temporary suspensions of European power market derivatives.
Windfall revenues: Levies would be imposed on European electricity producers by setting a threshold at less than the current market rate and using the cash to help reduce households’ soaring energy bills.
Clock is ticking: The Czech Republic, which holds the EU’s rotating presidency, called the extraordinary meeting, with Industry Minister Jozef Sikela outlining the current timetable. “I already see points where I’m pretty sure we will align. There’s no time to lose,” he declared, saying that direction must be agreed to by the end of Friday and a legislative proposal sent to the European Commission by the end of the month. (4 comments)
As the energy situation in Europe grows dimmer, ECB officials are preparing to double down on their aggressive monetary stance, loading up the policy rifle with more gunpowder. The central bank delivered a monster 75 basis point increase on Thursday, which was the largest hike in the institution’s 24-year history. The cost of energy was the biggest factor in sending the eurozone inflation rate to 9.1% in August, which the central bank is trying to put a lid on lest it spirals out of control.
Transcript: “We want all economic actors to understand that the ECB is serious. We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period,” ECB President Christine Lagarde declared. “We think it will take several meetings… How many is several? It’s probably more than two, including this one, but it’s probably also going to be less than five,” meaning rate hikes could continue into early 2023.
“I cannot reduce the price of energy,” continued Lagarde. “I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market… monetary policy is not going to reduce the price of energy.” The messaging leaves many to wonder about the role and strategy of the ECB, especially if it cannot fight structural energy issues and the supply-side problems. Rising borrowing costs will only increase the risk the eurozone slides into recession, and the central bank has even sharply reduced growth projections for next year. What is going on?
Economic communicator: Ultimately, government interventions are needed to shield energy users from some of the pain, but “the ECB has to see to it that these price pressures do not get embedded,” said Holger Schmieding, chief economist at Berenberg Bank. “They have to signal for workers and companies that the environment will be tough and that this is not a backdrop for huge wage increases, which in turn would add to inflation. The central bank wants to make sure that inflation expectations – after the current surge in energy prices has run through the system – stay modest by sending the signal of [front-loading rate hikes].” (6 comments)
Britain is dealing with similar problems to the European Union – but is dealing with them alone – after its Brexit vote and formal departure from the bloc in 2020. New Prime Minister Liz Truss announced a new energy plan on Thursday to tackle the issues, shortly after taking up residence at 10 Downing Street. The country is also digesting the death of Queen Elizabeth II, who was Britain’s longest-reigning monarch and passed away at the age of 96.
The plan: Starting from Oct. 1, the average U.K. household “will pay no more than £2,500 ($2,880) per year for each of the next two years,” resulting in “a £1,000 saving per year.” A similar guarantee will be provided for businesses over the next six months, with further support available for vulnerable industries like hospitality. In terms of the reaction, some constituents applauded the long-awaited relief, while others wondered if it would be paid by taxpayers in the long-term, or give utilities free rein to charge exorbitant prices.
The announcement is just the first part of a broader energy plan that will be detailed by Britain’s Chancellor of the Exchequer, Kwasi Kwarteng, later this month. “Far from being dependent on the global energy market and the actions of malign actors, we will make sure the UK a net energy exporter by 2040,” continued Truss. “Secure energy supply is vital to growth and prosperity, yet it has been ignored for too long. I will end the U.K.’s short-termist approach to energy supply once and for all.”
Elsewhere in Europe: Some EU countries are not waiting on determinations from the bloc, and are making attempts at shoring up their own energy infrastructure. Two floating liquefied natural gas terminals have just set up shop in the Netherlands, which can convert LNG into gas to be pumped across onshore networks. Germany, which previously received more than a half of its gas from Russia, is also chartering five “floating storage and regasification units,” or FSRUs, as well as Italy, France and the Baltics.
While the price of gas in Europe is surging, another energy source is going in the opposite direction. A barrel of Brent crude is now under $90 a barrel, while West Texas Intermediate is under $85, which is nearly 10% below the level at which the benchmarks traded before Russia’s invasion of Ukraine. Brent and WTI ended up hitting a high of around $130 a barrel during the crisis, and while the two are still up 13% YTD, they have been on a steady decline since mid-June.
What’s happening? The EU is the largest importer of natural gas in the world, and has built much of its grid based on the fossil fuel. Natural gas is used for everything, like cooking and heating for consumers, as well as electricity and power generation for heavy industry. The bloc used to be mostly resource-independent back in the 1960s and 70s, but North Sea gas fields have since been depleted, while the bloc has reduced its dependence on coal and rejected investments in nuclear energy. As a result, there has been a tremendous reliance on Russia, which has threatened to cut off supplies completely and sent benchmark Dutch TTF natural gas futures soaring.
Brent and WTI crude oil, on the other hand, are highly linked to forces of the global economy. Those forces, which at the beginning of the year were showing much promise due to the pandemic recovery, have recently soured. Recession talk is everywhere, while demand concerns, rising stockpiles, China lockdowns and the possibility of another release from the U.S. Strategic Petroleum Reserve are weighing on prices. In fact, crude is headed for a back-to-back weekly loss and is down over 4% since Monday.
Commentary: “This is the financial market selling off on the back of recession fears, it’s the continuation of the bearish macro backdrop,” noted Bjarne Schieldrop, chief commodities analyst at SEB. “We have extremely broad-based negative sentiment, which we have also seen in industrial metals.” (7 comments)
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