The price of Germany’s electricity over the next year has climbed over $1000pb in Brent oil energy equivalent terms. This is far from normal. It’s a crisis that stems not only from restrained energy supply from Russia but a series of unfortunate issues elsewhere too. In addition to energy restraints, the euro area is facing the full brunt of climate change with flash floods and record droughts, combined with slowing trade with China and US recession risks. However, we think the bigger challenge Europe will face this winter is not inflation, but stagflation. Altogether it’s why we expect EUR/USD to fall to 0.90 this winter, inflation to climb further to multi-decade highs before peaking, GDP to decline over the coming year and the ECB to first raise rates in response to higher inflation, and then cut next year as the energy-induced recession continues. Will Germany run out of gas? Probably not. That's due to LNG supply, but even more due to falling industrial demand. High prices and falling demand of an essential such as energy is not good for growth, but it gives hope that blackouts in Germany won't be the story of early 2023.

Eoin Treacy's view

This report shares the downbeat consensus view that Europe is going to endure a profound winter of discount. There is no doubt the challenges are immense but so have been the efforts to overcome them. For example, the EU has reached its November target for natural gas reserves. That suggests some slowdown in demand following indiscriminate buying over the last few months.

The common conclusion is Europe will be cold this winter. That’s less convincing now, even if a deep recession is inevitable. Balancing the energy demand story will require significant industrial slowdown.

The Euro STOXX Industrial Goods & Services Index continues to pull back from the region of the 200-day MA.
The Euro remains steady in the region of $1. Continued jobs strength in the USA is likely to continue to spur the Fed to action against inflation so there is continued potential for Dollar strength even if the potential for a reversionary move in favour of the Euro is improving.

Crude oil’s downward dynamic today completely reversed yesterday’s rebound back above $100 and suggests continued reticence by trades to ignore rising recessionary threats to demand.