Europe/ECB: Long cold winter

Parity level, spread, growth… Since the parity level has been caught in the Euro, it is necessary to make a few comments based on the economy, interest and market. We have been stating for a long time that the ECB will not be able to reach a tightening threshold as high as the Fed, due to the potential for economic crisis and the excessive recession possibilities of foreign dependency in energy. Although 25 or 50 bps projections are made for the ECB in July, the latest activity in energy shows that a serious bilateral crisis may be entered with the approach of winter. While the ECB tries to implement crisis stabilizing mechanisms such as spread control, the impact of the crisis seems to be energy-based, not market or finance-based.

The gas issue… The German government is asking citizens and companies to reduce their energy use and help fill their gas storage facilities before winter, due to concerns surrounding Russia’s gas imports. In June, Germany moved into the second phase of its three-tier emergency gas plan after Russia cut deliveries through the Nord Stream 1 pipeline. The second phase, called the Alarm Phase, is where there is a “significant deterioration” in gas supplies in Germany. According to the federal emergency plan, critical institutions such as homes and hospitals will be prioritized over industry during the third emergency phase, when the government enters fuel rationing.

Eurozone survey-based GDP growth forecasts, 2022 – 23… Source: Bloomberg

The role of Russian natural gas… Russia is Germany’s largest gas supplier. 37% of Germany’s gas needs, 29% of Italy, 16% of France; We see that 24% of the gas used by the union of 27 countries is supplied by Russia.

Western sanctions on Russia’s energy and Russia’s reduced energy exports to Europe limited supply to the continent and put pressure on prices. Germany has rushed to find alternative gas routes and LNG sources amid escalating tensions between the West and Russia since Moscow’s invasion of Ukraine in February. Citing the economy ministry, Welt am Sonntag reported that the country’s first two temporary LNG terminals in Wilhelmshaven and Brunsbuettel should be operational by the end of this year.

Europe looks set to start its heating season with the lowest gas stocks in more than a decade. This raises concerns about the reliability of winter supplies.

Conclusion? Apart from the Fed rate hike in the euro-dollar parity, it is useful not to ignore the difference in growth rates. When the ECB raises interest rates in July, it may balance the situation a little, but the real problem comes to the fore in a completely different dimension. In addition to the strengthening of the dollar, some developments also constitute the main lines of the weakening of the Euro.

The energy crisis in Europe caused by the Ukraine-Russia war fuels the concerns of economic recession. For example, Russia closed the Nord Stream 1 pipeline for ten days for maintenance work. This is a completely planned and annual maintenance work. After 10 days, depending on the developments, will Russia use energy as a strategic weapon or open the valve again? Russia’s complete cut off the gas to Europe will cause the winter to be cold, both figuratively and literally.

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