I must make a confession. I have been shorting everything Europe for the past few months. The Euro, the British Pound, and many European equities. All of this has been very profitable might I add. I even wrote an article months ago for readers warning about Europe’s problems and the trade being EURCHF (which yes, did close below parity as expected!).
Since I paused writing “negative” articles about Europe’s future, a lot has come out. The ECB is way behind the curve in raising interest rates, Italian bond yields are spiking and Italy’s Prime Minister has resigned, oh and this one is very important: France and the UK have already begun preparing for energy blackouts in Winter. Germany is already limiting heating and hot water to save energy.
It is going to be a rough winter for Europe. Not only do I expect energy shortages, but food and fuel as well. With electricity costs going out of control, many small businesses are feeling the pressure and it will get worse. Many in the UK are planning to not pay their energy bills come October. With living costs already high due to inflation, I do not joke around when I say this: people in Europe will have to make a choice whether they want to feed themselves and their family or stay warm in Winter.
Europe’s response? An energy cap where they will put a price limit on Russian gas and oil. The Russians have already responded by saying they will stop the trade of Russian petroleum products to nations which impose a price limit. The geopolitics get more interesting when you know that China and Saudi Arabia have been buying Russian gas and oil by the bunch and reselling these back to Europe for a higher price! Russia makes money, China makes money, Saudi Arabia makes money, Europe pays more for what was once cheap Russian gas and the European consumer pays for it. It really does make you question the intelligence of these European leaders, strategists and analysts.
The Russians may have already made the first move as it appears they have cut off gas supplies to Europe indefinitely. Russia claims punitive economic sanctions imposed by the West are responsible for the indefinite halt to gas supplies via Europe’s main pipeline.
It is now crisis aversion time for Europe. Do they have enough gas stored to last through Winter? Likely not. If they want cheap Russian gas, they will need to lift economic measures against Russia.
Europe is learning the hard way that they cannot wean off of Russian gas with the snap of a finger. Europe is looking to other sources such as North American liquefied natural gas (LNG). The problem? It is more expensive due to the transportation costs and facilities must be built to receive the LNG. It also means the higher costs are passed on to European consumers and means inflation levels will remain elevated.
A lot of eyes on Europe for many reasons as we approach the colder months. The ECB rate decision is this week on September 8th 2022. They are expected to raise rates but the question is by how much? Many are looking for a rate hike between 50-75 basis points. Whatever the case, the ECB is still way behind the curve as other central banks are likely raising rates to over 3% this month including Canada and the US.
Here are some charts that you need to keep an eye on if you want to play (or short!) Europe:
The Euro keeps on weakening. Everyone was speaking about the Euro when we broke parity, but I gave my readers and followers a heads up months before. Money will be running into the US Dollar and the Euro will feel the brunt of it. You also need to consider wealth in Europe. If they know what’s coming, European wealth is probably leaving Europe and heading for the US or…
Into Swiss Francs. Just last week, the EURCHF made new all time record lows, or put it another way, the Swiss Franc made a record all time high against the Euro. It appears as if the Euro might get a break, but this could be short lived. Watch this chart folks.
This is a chart touted as being the one that could break Europe. Italian bond yields are rising at a fast pace. So fast that in the past, the ECB had to call an emergency meeting to address rising bond yields. This adds to the drama on whether the ECB can raise rates higher. Italy also does not have a Prime Minister, and elections are to be held later this month. The outcome could see yields spike further.
Let’s end with natural gas. Some reprieve as natural gas has struggled to break above $9.50. It has ranged for a few weeks which is a telltale sign of exhaustion. The break below $9.00 also hints at a further move down to $7.50. But traders should expect volatility on this chart for the next few months ahead. Headlines will be European driven.