Soaring gas prices that threaten to push up winter fuel bills, hurt consumption and exacerbate a near-term spike in inflation are another blow to a world economy just getting back on its feet after the coronavirus shock.
The gas market chaos, which has driven prices 280 per cent higher in Europe this year and led to a 100-per-cent-plus surge in the United States, is being blamed on a range of factors from low storage levels to carbon prices to reduced Russian supplies.
So high are tensions that several European Parliament lawmakers have demanded an investigation into what they said could be market manipulation by Russia’s Gazprom.
Whatever the causes, the surge carries major market implications:
Analysts say it’s too early to downgrade economic growth forecasts but a hit to economic activity looks inevitable.
Morgan Stanley reckons the impact in the United States, the world’s biggest economy, should be small. While more than a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, it notes.
Overall though, higher gas prices raise the risk of stagflation – high inflation, low growth.
“It is quite clear there is a growing sense of unease about the economic outlook as a growing number of companies look ahead to the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.
Euro zone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by COVID-related supply bottlenecks. In Germany, 310,000 households face an 11.5 per cent increase in gas bills, data showed on Monday.
Noting German factory gate prices were already the highest since 1974, Citi analysts predicted 5 per cent hikes for electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.
Higher food costs are another side effect, given a shortage of carbon dioxide which is used in slaughterhouses and to prolong the shelf-life of food. Cuts in fertilizer production could also lift food prices.
Goldman Sachs predicts higher oil demand, with a US$5-per-barrel upside risk to its fourth-quarter 2021 Brent price forecast of US$80 a barrel. Brent is trading at about US$74 currently.
Central banks are sticking with the line that the spike in inflation is temporary – European Central Bank board member Isabel Schnabel said on Monday she was happy with the broad-based rise in inflation.
But as market- and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.
“If we have higher inflation, transitory or structural, and have slower growth – it will be a very tricky situation for markets and central banks to assess, navigate and communicate,” said Piet Haines Christiansen, chief strategist at Danske Bank.
This week’s central bank meetings could test policy makers’ resolve. The Bank of England meeting on Thursday is in particular focus, given U.K. inflation has just hit a nine-year high.
With U.K. producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices higher up and job vacancies tipping one million, there is a growing chance that higher prices will stick around for longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.
“If they do, more [BoE] members may move quickly to vote for a rate rise sooner than expected next year, but it would be an unpopular course of action with looming tax rises already hard to digest for many consumers,” she said.
Britain is considering offering state-backed loans to energy firms after big suppliers requested support to cover the cost of taking on customers from companies that went bust under the impact of gas prices. One firm, Bulb, is reportedly seeking a bailout.
France meanwhile plans one-off €100 (US$118) payments to millions of households to help with energy bills.
“The story emerging from the U.K. energy sector will soon be more relevant to the European market than Evergrande,” said Althea Spinozzi, senior fixed income Strategist at Saxo Bank.
And in a week packed with central bank meetings, she added that markets were “right to fret.”
Spain shocked the utility sector last week by redirecting billions of euros in energy companies’ profits to consumers and capping increases in gas prices. Revenue hits at Iberdrola and Endesa were estimated by RBC at €1-billion and shares in the companies sold off heavily.
Since the move, investors have fretted about contagion to other countries, Morgan Stanley said. While seeing those fears as overdone, the bank acknowledged there was a risk of margin squeezes at European utilities in coming months.
Sector shares are down for the third week straight
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Dollar set for another week of losses even as Fed tapering looms
The dollar was heading for a second week of declines on Friday as sentiment stayed tilted towards riskier assets, while an intervention by the Australian central bank put a halt to the Aussie dollar’s recent surge.
The dollar index was last at 93.733, little changed in Asian hours but off 0.24% on the week, as it continues its fall from a 12-month high of 94.565 hit in earlier this month.
It had managed to stem losses on Thursday, bouncing on better U.S. jobs and housing data, but the rally petered out on Friday morning in Asia, where risk sentiment was boosted news that beleaguered developer China Evergrande Group has supplied funds to pay interest on a U.S. dollar bond, averting a default.
But traders are still trying to assess whether the dollar has scope to fall further, or if this is a temporary blip on a march higher.
“People are wondering whether we are at an inflection point, as the dollar has been weakening and that doesn’t really fit with the broader narrative that global growth is cooling and the Fed is on the path to tapering, which should be supportive for the dollar,” said Paul Mackel, global head of FX research at HSBC.
On Friday, benchmark 10-year U.S. Treasury yields were at 1.6872%, slightly off from Thursday’s multi-month high of 1.7%, as markets continue to prepare themselves for an announcement by the Federal Reserve that it will start to wind down its massive bond buying programme, which is widely expected for November.
Mackel said part of the reason for the dollar’s weakness had been strong performances by currencies from most commodity exporting countries.
These were quieter on Friday, however, as traders took profits, analysts said, and energy prices softened.
Brent crude, which had risen above $86 dollars a barrel on Thursday, continued its tumble and was last at $84.10.
The Australian dollar was at $0.7475, off Thursday’s three-month top, as the boost to the China-exposed currency from Evergrande’s news was outweighed by action from the Reserve Bank of Australia to stem a bond sell off, as well as the pause in energy price rises.
The RBA said on Friday it had stepped in to defend its yield target for the first time in eight months, spending A$1 billion ($750 million) to dampen an aggressive bonds sell-off as traders have bet on inflation pulling forward rate hikes.
Also affected by energy prices, the Canadian dollar slipped to C$1.2352 per U.S. dollar, off Thursday’s C$1.2287, a level last seen in June.
The British pound paused for breath at $1.3798, off a month peak hit earlier in the week, to which it had been carried by growing expectations of an interest rate hike to combat rising inflationary pressures.
The euro was little changed at $1.1627, while the yen wobbled within sight of its multi-year lows, with one dollar worth 114.01 yen, compared with 114.69 earlier in the week, a four-year low.
China’s yuan eased against the dollar on Friday after the FX regulator warned of possible action if the currency market is hit by greater volatility following its recent rally. But the yuan still looked set for the biggest weekly gain since May.
Bitcoin was at $63,928, a little off Wednesday’s all-time high of $67,016
(Reporting by Alun John; Editing by Sam Holmes and Kim Coghill)
UN sets up trust fund for 'people's economy' in Afghanistan – The Globe and Mail
The United Nations said on Thursday it had set up a special trust fund to provide urgently needed cash directly to Afghans through a system tapping into donor funds frozen since the Taliban takeover in August.
With the local economy “imploding”, the aim is to inject liquidity into Afghan households to permit them to survive this winter and remain in their homeland, it said.
Achim Steiner, the U.N. Development Programme’s (UNDP) administrator said Germany, a first contributor, had pledged 50 million euros ($58 million) to the fund, and that it was in touch with other donors to mobilize resources.
Some 97% of Afghan households could be living below the poverty line by mid-2022, according to UNDP.
“We have to step in, we have to stabilize a ‘people’s economy’ and in addition to saving lives we also have to save livelihoods,” Steiner told a news briefing.
“Because otherwise we will confront indeed a scenario through this winter and into next year where millions and millions of Afghans are simply unable to stay on their land, in their homes, in their villages and survive,” he said.
The International Monetary Fund said on Tuesday that Afghanistan’s economy was set to contract https://www.reuters.com/world/asia-pacific/afghanistans-economic-collapse-could-prompt-refugee-crisis-imf-2021-10-19 up to 30% this year and this was likely to further fuel a refugee crisis that would affect neighbouring countries, Turkey and Europe.
The Taliban takeover saw billions in central bank assets frozen https://www.reuters.com/world/asia-pacific/un-chief-liquidity-needed-stem-afghanistan-economic-humanitarian-crises-2021-10-11 and international financial institutions suspend access to funds, although humanitarian aid has continued. Banks are running out of money, civil servants have not been paid and food prices have soared.
Steiner said the challenge was to repurpose donor funds already earmarked for Afghanistan, where the Taliban, the de facto authorities, are not recognized internationally. The fund allows the international community to be “confident enough that these funds are not meant as government-to-government funding”, he said.
VIRTUALLY NO LOCAL CASH
The U.N. has discussed the programmes with the Taliban, he said, noting that 80% of the micro-businesses being helped were led by women.
“Our greatest challenge right now is that there is a economy in which there is virtually no domestic currency in circulation,” Steiner said, adding that the U.N. wanted to avoid foreign currencies dominating, which would undermine the economy.
“Our intent is to find ways very quickly in which we can convert international support into local currency in order to be able to stimulate local markets, local livelihoods. This is how you keep an economy alive,” he said.
Kanni Wignaraja, director of UNDP’s regional bureau for the Asia Pacific, said that cash would be provided to Afghan workers in public works programmes, such as drought and flood control programmes, and grants given to micro-enterprises. Temporary basic income would be paid to the vulnerable elderly and disabled, she said.
The UNDP had costed activities to be covered over the first 12 months at approximately $667 million, she said.
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