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Europe is starting 2023 with brighter prospects than could not have been expected a few months ago. The unusually warm weather has invalidated concerns that there would be disruptive gas shortages and rationing over the winter. Natural gas prices have been falling steadily since August 2022 from a peak of $9.98 to a low of $2.98 on Wednesday, and LNG supplies from the U.S. and the Middle East kept flowing.
The steadying of the eurozone grows hopes that the block might escape a recession. Fears over the energy market have been alleviated by falling oil and gas prices, also helped by the warmer than usual weather and generous government assistance.
Despite facing a significant energy crisis, the Eurozone’s industrial sector has performed unexpectedly well in the aftermath of the pandemic. Recent data shows an annual growth of 1.9% in industrial production, indicating that post-pandemic recovery has outweighed the negative impact of higher energy prices. However, it’s important to note that industrial production is only slightly above its pre-pandemic level and if the energy crisis persists, it could have a more significant impact on production in 2023.
Looking ahead to 2023, the outlook for the industrial sector is less bleak as the energy crisis moderates. Supply chain issues are expected to improve, and lower input costs will benefit energy-intensive sectors. However, there is still a risk of the energy crisis flaring up again and a decrease in demand for goods. Overall, while the industrial sector has avoided contraction so far, we should not expect too much from it in 2023, and the risk of delayed contraction remains a concern.
The recent monetary developments in the Eurozone indicate that the interest rates hike of 2022 are starting to work as intended. A decrease in private sector borrowing in December indicates that the European Central Bank’s recent shift in monetary policy is starting to have the desired impact.
While this will likely have a negative effect on economic growth in 2023, it is not likely to influence the ECB’s decision on interest rates at their upcoming meeting on the 2nd of February and we anticipate a 50-basis point hike, followed by another 50-basis point in March.
However, as the ECB continues its hawkish stance, it is important to consider the potential consequences on an already struggling Eurozone economy and its ability to adapt to increasingly higher interest rates remains a significant concern.
Meanwhile in Italy, the government plans to review and extend existing relief measures aimed at helping families and firms cope with sky-high energy prices. The government is working on a temporary cap on energy prices under the so-called “two-tier approach” proposed by the European Commission.
The Central Bank of Italy has reported that economic activity in the country has weakened in the last quarter of 2022, with the decline in industrial production and the waning recovery in services contributing to this trend.
Additionally, household spending has slowed down. Harmonized consumer price inflation stood at 12.3% in December on an annual basis, primarily driven by the energy component. The bank also noted that firms participating in their surveys consider that investment conditions remain unfavourable.
Employment grew slightly in October and November, and wage growth remains moderate. The bank’s projections indicate that GDP growth will weaken to 0.6% in 2023 but is expected to strengthen again in the following two years.
Consumer price inflation reached almost 9% in 2022 and is projected to decline to 6.5% in 2023 and reach 2% in 2025. Under an adverse scenario that assumes a permanent suspension of gas supply from Russia to Europe, GDP is expected to fall in 2023 and 2024, with a moderate growth the following year.
Throughout 2022 the global economy was affected by the ongoing war in Ukraine, high inflation, and weakening economic activity in China, which contributed to a slowdown in global demand and sharply lower equity prices.
From its January 2022 high of 28,212 the Italian benchmark index the FTSE MIB has lost more than 8,000 points (circa -28%). Recent signs that inflation is softening, improved supply chains, revised global growth forecasts and the sudden easing of three years of COVID-19 restrictions in China have raised hopes the corporate downturn may not be as severe as feared just a few weeks ago.
The FTSE MIB index rebounded strongly since October 2022, gaining around 29% in the short span of three months. This was primarily due to improvement in economic data, which mitigated concerns regarding an impending recession.
The upcoming earnings season will likely show whether the renewed optimism about the Italian economy that has buoyed equities over the past few months could be justified. On Thursday the index reclaimed the 26,400 level, trading at an 11-month high and approaching its January 2022 high of 28,095. The most bullish scenario at this juncture in time is a re-test of the previous highs, where strong resistance is likely to arise, which could be followed by a decline taking several months to unfold.
Active traders looking for magnified exposure to global indices may consider our wide range of thematic ETPs.
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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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