Weekly Brief: Europe Feels The Burn, As Russia Squeezes Gas

Weekly Brief: Europe Feels The Burn, As Russia Squeezes Gas

over 1 year ago3 mins

Russia is squeezing the flow of energy supplies to Europe – and squeezing the euro zone’s consumers and economies in the process.

🕰 Recap

  • A few months ago, the European Union (EU) proposed that its member countries cut their gas use after Russia squeezed gas flows to the region
  • That seems to be working: data this week showed Europe is two months ahead of schedule in refilling its storage
  • While that helped temper prices somewhat, euro-zone inflation still hit another record high last month, and some are betting that could force the European Central Bank to get more aggressive

✍️ Connecting The Dots

Russia’s been steadily cutting the supply of natural gas into Europe for months now, and that spurred the bloc into action, building up reserves of the all-important fuel before winter. That’s worked so far: the European Commission revealed this week that reserves are already 80% full, a target the EU had only aimed to reach by November 1st.

While that by no means ends Europe’s energy crisis, it does mean Europe is better placed to face any further cuts in supply that might happen after this week’s maintenance shutdown of the key Nord Stream pipeline. That top-up – along with a 12% drop in consumption of gas in August – helped European gas prices fall, with futures now down about a third from last week’s high. Still, prices are more than four times what they were last year, and that showed up in euro-zone inflation, which hit another record in August. That’s got more economists and traders betting Europe’s central bank will hike interest rates by a massive 0.75 percentage points when it meets next week.

🥡 Takeaways

1. Consumer confidence isn’t looking good.

Rising inflation and interest rates only squeeze consumer budgets further, so – along with the growing likelihood of a recession in both the euro zone and the UK – it’s no surprise that consumer confidence reports make for grim reading right now. Case in point: consumer confidence in the euro zone and the UK are at or near all-time lows. That could spark a vicious cycle, whereby consumers and businesses hold back on their spending as they anticipate a recession – and in turn make the slowdown even worse.

2. This could all play into the hands of firms that offer buy-now-pay-later (BNPL) services.

Stretched consumers might find themselves leaning toward the interest-free loans that BNPL firms offer – just to cover basic expenses. That’s likely partly why Klarna was able to grow so quickly in the US last quarter. But more desperate users turning to Klarna also meant more losses, with more borrowers unable to pay back their loans. And that kind of scenario may just pile up going forward. So as the one-time most-valuable-startup in Europe, Klarna may not be the eventual winner of the BNPL boom. Instead, it might be traditional banks like HSBC and Barclays that now offer similar services: after all, they already have a huge customer base, big cash piles to lend from, and experience with the sort of regulatory clampdown that’s on the horizon for the BNPL sector.

🎯 Also On Our Radar

The euro hit the unenviable goal of reaching parity with the US dollar last month – and soon, it might not be alone. Economists are saying more and more that the prospect of a British pound at parity with the greenback isn’t so outlandish. That’s thanks to a combination of Brexit and the fact that the Bank of England probably can’t raise rates too much further before the economy falters, while the Federal Reserve is sticking to the idea it can. In fact, the probability of the sterling versus the dollar – the world’s oldest traded currency pair – hitting record lows of $1.05 by the end of the year is 1-in-7, fairly high given that was once unthinkable.

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