Below is an excerpt from the recent issue of Bitcoin Pro Magazine, Bitcoin Magazine’s premium market newsletter. To be among the first to get these insights and other online bitcoin market analysis straight to your inbox, follow now.
Evolution of the European Energy Crisis
In last Thursday’s dispatch, we addressed the dynamics of this inflationary bear market, where conditions of the global macro landscape are rapidly re-pricing global interest rates higher. Similarly in our “Energy, Currency & Debalancing” series,
Since our latest release, the response from European governments to “fight” rising energy costs has been astounding.
In the UK, newly appointed Prime Minister Liz Truss has launched a draft of the plan as a response to soaring consumer energy bills. Policy plan could be worth £130 billion in the next 18 months. The plan details the government’s step in setting new rates while ensuring financing to cover price differences for private sector energy suppliers. Using the 2021 annual numbers, the plan would be around 5.9% of Gross Domestic Product. A stimulus of 5% of UK GDP would be roughly equivalent to a US$1 trillion stimulus package.
There is also a separate cost plan £40 billion for UK businesses. Taken together, they represent about 7.7% of GDP for what could be a first pass of stimulus and prudent spending to offset a longer, sustained period of energy bills. much higher across Europe over the next 18-24 months. The initial policy scope appears to have no limits on its spending, so it is essentially an open short position in energy prices.
Ursula von der LeyenThe president of the European Commission, tweeted the following:
The projected price cap of Russian oil is important for a number of reasons: First, with the European solution to the incumbent energy crisis appearing to be fiscal stimulus packages and energy allocations. , which affects the euro and the pound, both energy currencies. importing sovereign companies, only complicates its problems.
Even if the European Central Bank (ECB) and the Bank of England are expected to roll back their pandemic-era easing programs, the solution Western voters may be asking for is “rescue packages”. energy”. Some call this Europe’s Lehman Moment, in reports yesterday from Bloomberg, “Energy trading punctuated by $1.5 trillion margin call. “
“Liquidity support is needed,” said Helge Haugane, senior vice president of gas and electricity at Equinor. The issue, he said, is focused on derivatives trading, while the physical market is active, he said, adding that the energy company’s estimate for $1.5 trillion to support the so-called trading Paper translation is “caution”.
Similarly, Goldman warned of a bleak market outlook.
“Markets continue to underestimate the depth, breadth and structural consequences of the crisis,” wrote Goldman Sachs analysts. “We believe these will be even deeper than the oil crisis of the 1970s.”
The energy crisis is now predicted to cost the European continent around €2 trillion, or 15% of GDP.
“Given current futures prices, we estimate that energy bills will peak early next year at €500/month for a typical European household, implying a year-on-year increase of c.200%. 2021. For the whole of Europe, this implies a c.€2 TRILLION in energy bills, or c.15% of GDP.”
While this figure is likely to fall due to subsidized prices, the currencies are falling meaningfully against the dollar (still the current unit of trade for global energy), while itself The dollar has been undervalued in terms of energy.
However, the business sector is one of the losers, as rising energy allocations and costs are hitting European industrial producers.
The chart above shows German factory orders by month in the fall.
“The cuts add to the burden that the energy crisis is placing on Europe’s metals industry, one of the largest consumers of energy and gas. A group representing the region’s biggest producers has written to European Union politicians warning that the energy crisis could cause ‘permanent deindustrialization’ in the bloc, unless when a package of support measures is implemented. “
Aluminum, which requires about 40 times more energy than copper to produce, is quite energy-intensive.
“This is a real existential crisis,” said Paul Voss, General Manager of European Aluminum, which represents the largest producers and processors in the region. “We really need to sort something out pretty quickly, otherwise there will be nothing left to fix. “
What is being demanded by the structural energy deficit in Europe is the populace and the business sector requiring a risk-tolerant balance sheet. Subsidies on energy bills or price caps do not change the absolute number of molecules of high energy density fossil fuels on the planet. The price cap and subsequent reaction from Russian President Vladimir Putin is what makes the difference, and it has the potential to produce potentially devastating results in financial markets.
No government will allow its citizens to starve or freeze to death; it is the same story throughout history with sovereign states assuming future debt obligations to solve today’s problems. This only happened at a time when some European countries had public debt-to-GDP ratios higher than 100%.
A sovereign debt crisis is brewing in Europe, and the most likely outcome is that the European Central Bank must step in to rein in credit risks, prolonging the euro’s departure.
We’ve talked a lot about the sharp rise and rate of change in 10-year yields in the United States, but it’s the same picture in every major European country despite rising actions. slower interest rates from different central banks.
European debt yields, which also take into account future inflation expectations, remain show no signs of slowing. Bank of England forecasts Consumer Price Index inflation 9.5% through 2023 (read “Bitcoin’s Seven Daily Candles“Where we refer to their latest August currency report) and the European Central Bank are expected to raise interest rates by 75 basis points in their announcement tomorrow, after just from negative interest rates. For what it’s worth, the probability for the Federal Reserve to raise interest rates by 75 basis points for the Federal Open Market Committee meeting two weeks ago now stands at 80% (intraday price vs. 73% on September 6).
With political pressure mounting, high inflation, even with recent signs of a small deceleration, continues to leave central banks with no other viable options. They must “do something” in an effort to maintain their 2% inflation target even if it causes only a fraction of commensurate demand destruction. This is largely where investors’ argument around peak rates and “the Fed can’t raise rates” has been crushed. Although the increase in government yields is not sustainable to solve the long-term interest payment burden, we are still waiting for that breakout point to force a change of direction.
The quadratic inflationary effects of the lifting of more fiscal stimulus and/or the foreclosure of US Treasury collateral markets are what to watch out for.