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As of last week, the entirety of the Eurozone is in the throes of an electricity crisis. Almost very significant country in the Continent is now operating at electricity prices north of EUR 600/MWh.
For context, the previous decade’s average electricity cost was in the EUR 20-30/MWh range, signifying a nearly 20X increase over a 10-year period. In the year-ahead timeframe, both Germany and France are particularly hard hit and showing very strong correlation – with France’s electricity costs now exceeding Germany’s.
This is a particularly trenchant problem for a country’s economy: electricity is a necessary “input” for factories, offices and tech companies to continue operating. With even the year-ahead price trajectories spiking upwards, the prospect of increasing costs affecting companies’ profits – even if they do well – would shift stock valuation goalposts further upwards.
The main factor for this is, of course, Russia reducing gas supplies to the European Union nations in the wake of sanctions imposed on Russia after the start of the “special military operation” in Ukraine. However, another massive factor has been a decade-long tendency in the Continent’s legislative bodies to sacrifice energy independence by prioritizing the pursuit of clean energy infrastructure while simultaneously shutting down domestic coal-fired and nuclear energy plants instead of phasing out the latter after the clean energy network became viable. Thus, while Russian actions do play a hand in the current situation, so do historic executive decisions by the Continent’s leadership.
As of the beginning of last week, Germany’s 1-year ahead power price shows a very strong correlation with the Gas Price benchmark for the Eurozone. This is, of course, a long-term trend.
However, it bears remembering that gas isn’t just used in electricity generation. For instance, in Germany, gas consumption in the power generation industry accounts for only 10% of total consumption.
Industrial usage and household heating collectively vie for the top spot in energy consumption at 37% and 31% respectively. This trend largely holds true across most European “powerhouse economies” (such as France).
In light of the energy crisis, the German government has initiated a number of restrictions:
Also, European nations have been attempting to address their massive dependence on Russia by diversifying their supplier base. The world’s largest gas producer – the United States – has now become the world’s largest gas exporter. European nations have been the largest beneficiaries of this shift by a massive margin.
However, this has come at a significant cost to “emerging nations” in South/Southeast Asia and Latin America such as India and Brazil.
In terms of Europe’s geopolitical influence, this has not boded well. In many of these “emerging nations”, political leadership, media commentariat and populace question why they pay the price for forced errors of another bloc. As long ago as June, India’s Foreign Minister Dr. Subramaniam Jaishankar took on European think-tanks and polity head-on at the GLOBSEC Forum held in Slovakia’s capital Bratislava in the wake of repeated calls for India to “repudiate” its ties with Russia:
Europe has been silent on many issues. Europe didn’t speak on many issues in Asia… somewhere Europe has to grow out of the mindset that Europe’s problems are the world’s problem but the world’s problems are not Europe’s problems.
Since then and given the shift in energy supplies, India’s energy imports from Russia has seen a rapid increase, with talks now ongoing between Russia, Iran, India and various ASEAN nations to start denominating energy trades (as well as trade in general) in domestic currencies instead of the US Dollar or the Euro.
The economy is a multi-factor interlocking network of inputs and outputs, both qualitative and quantitative. The lack of long-term vision in the energy sector and the resulting pressure on geopolitical ties on populations entirely uninvolved in the conflict might have been “rationalized” if all energy was the only factor awry in Europe’s economic rubric. However, this is not the case. For almost two years now, European consumers have been under considerable pressure, as exemplified by plunging consumer confidence in Germany.
This drop encompasses both an increasing unwillingness of the German consumer to part with hard-earned Euros for consumption of high-priced goods and services as well as the fraying purchasing power of said Euros in the wake of long-standing inflation, which has not seen any materially significant remedies by the government. This form of stasis is evident in virtually every country in the Continent. As a result, the pressure on geopolitical ties is largely for naught and only delays the inevitability of a “long recession” in the Continent to a small extent.
The increasing relevance of US companies in the European energy markets might be a strong factor in the rise of the S&P 500 over the course of the previous week: virtually every riser has been an energy company.
For those seeking to interpret the rise in the S&P 500 as evidence of an economic recovery in the US should bear in mind the momentum seen in the constituents of the “tech heavy” Nasdaq-100 over the same period: nearly every leading company outside of the energy sector continues to register a fall in returns.
For investors (particularly retail), this once again highlights the potential of a tactical investing mindset and the need to shift perspective from an intangible “horizon” to the more tangible “immediate”.
Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500, the upside or the downside to the Nasdaq-100, and the upside or the downside to the German DAX.
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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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