After reaching a record high of 16,282 in November 2021, the German benchmark index reversed its prior bull run and has been trading in a secondary down trend since. At this juncture sentiment is fragile and investors remain cautious following the recent August U.S. CPI data which sent global markets reeling.
The latest German PPI MoM data showed a rise of 7.9% in August and 45.8% over the year, much higher than market expectations. The main culprit behind this development are the rising energy prices. Energy prices are up 139% from a year ago and by 20.4% from July. Electricity prices in particular rose 175%.
The Eurozone started preparations for mass blackouts which are likely to occur during the winter months. The German Regulator issued a warning that the likelihood of gas shortages this winter remains. Charles Michel, the President of the European Council recently said that the bloc must reduce energy consumption and increase supply and suggested that the EU needs to engage with Algeria, Qatar, UAE and Saudi Arabia to manage the current crises.
Germany is already making progress in replacing Russian gas imports, with Chancellor Olaf Scholz signing a deal for the supply of LNG and diesel with United Arab Emirates this weekend. Scholz signed a contract for delivering 137,000 cubic meters of LNG, which is likely to arrive in Germany in December. The LNG deal makes up only a small part of the 56.3 billion cubic meters of gas that Germany received from Russia in 2020.
Recession in Europe appears to be increasingly likely, and pressure remains on the stock markets as policymakers are battling soaring inflation, declining currency prices and a slowdown in economic activity. Although, the European Central Bank hiked its key interest rates by a historic 75-basis points in September, the risk to inflation outlook remains primarily to the upside – increasing the probabilities for frontloading and extending the tightening cycle.
The ECB is expected to raise interest rates by 75 basis points at its October and December meetings, adding to the previous 125 basis points hikes at its last two meetings. The Eurozone CPI data for August climbed 0.6% MoM, bringing the annual rate to 9.1% strengthening this view. Recently the World Bank and the International Monetary Fund warned of an impending global economic slowdown and concerns about possible stagflation, hitting sentiment even further.
