Europe’s Chemical Industry at the Brink: Can It Reclaim Strategic Ground?

Economic

Summary:

Europe’s petrochemical sector is crumbling under global competition, aging infrastructure, and high costs, forcing governments and companies to either act swiftly or concede long-term dependency on foreign imports....

Industrial Retreat Under Economic and Competitive Pressures

Europe’s petrochemical sector is in an increasingly precarious position. Years of mounting financial losses, paired with aging facilities and soaring production costs, have accelerated the closure of steam crackers the backbone of chemical processing across the region. These facilities, essential for transforming hydrocarbons into core materials like ethylene and propylene, are being dismantled or mothballed as the region becomes more reliant on imports to meet industrial demand.

The situation reflects structural disadvantage, not temporary strain. Most European plants still rely on naphtha, a costlier feedstock compared to the ethane used in the United States and Middle East. Ethylene production in Europe can cost up to $800 per metric ton, while the same process in the U.S. and Middle East costs under $400 and $200 respectively. This stark difference in input costs results in European producers being outpriced both domestically and internationally.

Global Supply Shift and Import Reliance

While Europe shuts plants, the rest of the world is accelerating expansion. China's petrochemical capacity is growing annually by 6.5 percent and is set to reach nearly 87 million metric tons of ethylene by 2030 more than three times the EU’s current capacity of 24.5 million. North America is also expanding its ethylene infrastructure, targeting 58 million metric tons by the end of the decade. These developments fundamentally shift supply dynamics, increasing Europe’s exposure to import dependency.

The geographical spread of production is also becoming more complex. Chinese firms are establishing manufacturing hubs in Southeast Asia to circumvent tariffs and carbon border adjustments in Western markets. This tactic directly targets Europe’s vulnerable position, placing additional pressure on policymakers to either incentivize local production or surrender cost advantages to external producers.

Policy Recognition and Strategic Response

Faced with mounting evidence of industrial erosion, European policymakers have begun acknowledging the strategic threat. In March, eight EU countries, including major economies like France and Italy, called for a “Critical Chemicals Act.” The European Commission has since pledged new state aid schemes to modernize domestic facilities and give preference to EU-made goods in public procurement an approach similar to its metals and minerals policy introduced in 2023.

While these initiatives signal a shift toward industrial intervention, their late arrival raises concerns about their practical impact. Steam crackers in Europe are, on average, more than 40 years old. Their continued operation often falls below the 80 percent utilization threshold considered necessary for profitability. Consultancy Wood Mackenzie estimates that up to 40 percent of Europe’s current ethylene capacity is now at medium or high risk of shutdown. This creates an environment where political action may stabilize only a fragment of the sector, rather than reverse its overall contraction.

Corporate Strategy and Sector Consolidation

In response to collapsing margins, companies are diverging in strategy. Some, like Eni, are shifting investment toward renewable and circular models, including bio-refineries and chemical recycling. Eni’s Versalis unit has already closed Italy’s last two steam crackers after incurring over 3 billion euros in losses over the past five years. Meanwhile, global giants such as Dow, ExxonMobil, TotalEnergies, and Shell are scaling back European operations or reviewing their chemical portfolios entirely.

Others are making aggressive plays to remain relevant. INEOS, one of the region’s few vertically integrated petrochemical firms, is constructing a 4 billion euro ethane cracker in Antwerp Europe’s first new facility of this kind in three decades. Designed to produce 1.45 million metric tons of ethylene per year by 2026, the facility is engineered to rival Chinese efficiency while maintaining a lower environmental footprint. Still, its success will depend on a delicate balance between energy prices, trade policy, and downstream demand.

Geopolitical Stakes and Market Futures

European leaders now face a decision that transcends economics. As EU Industry Commissioner Stéphane Séjourné framed it, retaining domestic chemical capacity is a matter of sovereignty. Losing steam crackers may not immediately paralyze Europe’s economy, but it creates long-term vulnerability by tying core industrial capabilities to geopolitical tensions and global market fluctuations.

Yet this sovereignty is costly. Without coordinated upgrades and long-term support, only a small cluster of dominant players will have the scale and capital to weather global pricing pressures. Academic observers suggest that Europe’s chemical future will be marked by consolidation, with a few firms setting market prices while others transition to import-dependent models or alternative energy paths.

Europe’s chemical industry is not disappearing overnight, but the conditions shaping its decline are now clearly visible. The interplay between high input costs, old infrastructure, and global overcapacity has created a structural imbalance that threatens to hollow out domestic production. While recent policy gestures suggest an awareness of the stakes, reversing this decline will require more than reactive aid. It demands a cohesive industrial strategy that reconciles cost disadvantages with the broader imperative of strategic autonomy. The window for decisive action is narrow, and failure to act soon may result in long-term industrial retreat.

Source: Reuters

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Gerik

Economic

Economic Expansion Softens the Impact of Fiscal Slippage

The recent upper house election in Japan has shaken the country’s political landscape, weakening Prime Minister Shigeru Ishiba’s ruling coalition and increasing the likelihood of broader fiscal stimulus, including potential tax cuts. While such a scenario would typically raise alarm over public debt sustainability, current market conditions paint a more nuanced picture. Japan’s debt burden remains staggering in gross terms, surpassing $8 trillion and amounting to roughly 250 percent of GDP. However, the nation’s steady growth and inflationary recovery over the past three years are contributing to a more stable macroeconomic backdrop that offsets the dangers associated with a wider deficit.

One key reason bond yields have not surged in tandem with fiscal risks is Japan’s relatively low net debt. Unlike many other developed economies, Japan is a net creditor, with considerable overseas assets managed by institutions like GPIF and life insurers. The presence of this external wealth enables Japan to avoid dramatic market dislocations in its bond market, even when fiscal spending increases. Moreover, these macroeconomic trends are not just coincidental but are structurally interlinked: economic recovery and inflation make the real debt burden more manageable and help sustain investor confidence.

Yield Stability Supported by Domestic and Foreign Demand

Despite the potential for fiscal expansion, Japanese government bond (JGB) yields remain contained. Thirty-year bond yields hover near 3 percent, and while the yield curve has steepened significantly with a 150-basis-point spread between 10-year and 30-year maturities this reflects gradual normalization rather than panic. Analysts expect 10-year JGB yields to reach 2 percent by 2026, assuming a shift toward more hawkish monetary policy.

Foreign investors have played a crucial role in this dynamic. Attracted by the interest rate differential and a weak yen, they have injected more than 15 trillion yen (approximately $101 billion) into Japanese bonds in 2025 alone. This investment behavior reflects a relative value strategy, as Japan’s yield curve provides better swap-adjusted returns than many other developed markets. For example, converting dollars into yen to purchase one-year JGBs currently offers a yield advantage over similar-duration U.S. Treasuries, even after factoring in currency swaps.

The combination of yield curve steepness and stable long-term inflation expectations positions Japan as an attractive destination for global fixed-income portfolios. Portfolio managers are not merely responding to opportunistic yield-chasing but are engaging in rational, value-driven reallocation, further anchoring the JGB market.

Currency and Policy Dynamics Remain Central

The Japanese yen, while weak, is described by institutional investors like Invesco as a “very attractive currency.” This reflects not only currency fundamentals but also strategic investor behavior in response to global monetary divergence. As the U.S. Federal Reserve holds rates higher for longer and the Bank of Japan maintains relatively dovish positioning, the yen offers substantial advantages for foreign capital seeking yield differentials through swap mechanisms.

However, while these structural and market-based supports currently mask fiscal vulnerabilities, they do not eliminate them. Any deviation in growth trajectory, domestic inflation moderation, or significant political instability could alter investor sentiment and spark a sharper repricing of risk in the JGB market.

Japan’s current fiscal and yield environment is the product of a confluence of growth recovery, investor confidence, and international positioning. The relationship between fiscal expansion and bond yields appears moderated not by coincidence, but by structural factors such as creditor status, domestic savings behavior, and global market positioning. Nevertheless, these stabilizing influences depend on a delicate balance. Sustaining investor appetite and macroeconomic momentum will be critical if Japan continues down the path of fiscal loosening, particularly in a volatile geopolitical and trade environment.

Source: Reuters

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Winkelmann

Forex

Economic

Tariff Fallout in Focus

Trade tensions remained a dominant theme throughout the week, with investors closelymonitoring developments as the August 1st tariff deadline approaches.At the G20 Finance Ministers Meeting in South Africa, the absence of U.S. TreasurySecretary Scott Bessent—for the second time this year—was viewed as a sign of reducedU.S. engagement. Under Secretary Michael Kaplan attended in his place.The G20 issued a joint communiqué reaffirming central bank independence and cooperationvia the WTO, signaling a united stance in support of free trade and opposition to rising tariffthreats.

U.S. Dollar: Further Rebound Depends on Counterparts

Markets Mixed on Tariffs Fallouts;Is the Dollar Poised for Further Rebound?_1

DXY.cash, H4 Chart

In the FX market, the U.S. Dollar continued its recovery, rising back above the 98 mark andfinishing the week as the top performer among major currencies.

From a technical perspective, the U.S. Dollar Index reclaiming 98 could point to furtherrebound potential or a short-term bullish reversal in the making.However, the key challenge remains whether the Dollar can test the psychological 99–100level.Much of the Dollar’s direction will also depend on how other major currencies—particularlythe Euro—respond. The Euro has been notably strong in recent months, making itsperformance a critical counterbalance to the Dollar.This week, market focus will turn to how the Eurozone reacts to tariff threats, along with keydata releases, including EU PMIs and the European Central Bank (ECB) rate decision.

EURUSD: Poised for Deeper Correction?

While no rate change is expected from the ECB, forward guidance will be closely watched.With both growth and inflation still subdued, any dovish tone or signals of future easing couldweigh on the euro—especially amid rising trade risks.

Markets Mixed on Tariffs Fallouts;Is the Dollar Poised for Further Rebound?_2

EURUSD, Daily Chart

EURUSD has broken out of a previous channel but remains supported above the key 1.1600level.The upcoming ECB decision and tariff-related headlines could act as catalysts. A sustainedbreak below 1.1600 would likely trigger a deeper pullback.

Yen Pressure Amid Political Uncertainty & Fiscal Risk

The Japanese Yen remains under pressure, continuing to rank among the weakest majorcurrencies. This weakness is driven by rising fiscal concerns and climbing JapaneseGovernment Bond (JGB) yields amid ongoing political uncertainty.Market participants are increasingly wary that the weakened ruling coalition could resort topopulist stimulus measures—such as consumption tax cuts, cash handouts, and expandedfiscal spending—in a bid to regain public support.This prospect has led to a sharp rise in long-dated JGB yields, with the 30-year yield hitting amulti-month high on Monday, further weighing on the Yen.

USDJPY: Traders Eye 150-Key Level

USDJPY extended its rally to a fresh four-month high, driven by broad-based Yen weakness.The pair has decisively broken above the 148.00 level, prompting speculation about potentialresponses from Japanese authorities—including possible intervention from the Bank ofJapan (BoJ) or Ministry of Finance (MoF).Adding to the spotlight, former President Trump has recently voiced concerns over Japan’scurrency depreciation, raising speculation that he may take a firmer stance in ongoing U.S.-Japan tariff negotiations.

Markets Mixed on Tariffs Fallouts;Is the Dollar Poised for Further Rebound?_3

USDJPY, H4 Chart

Traders remain on high alert as the pair approaches the critical 150.00 resistance level,closely watching for any policy signals or potential intervention efforts from Japaneseauthorities.Technically, 150.00 stands as a key psychological and political threshold. While the Yen’sweakness may persist, any verbal or actual intervention near this level could spark sharpvolatility.However, if investor sentiment stays fragile amid ongoing uncertainty surrounding Japan’spolitical and fiscal outlook, USDJPY could still find momentum to retest the 150.00 level—oreven break above it.

Source:AETOS

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Gerik

Economic

China–U.S. Trade War

Escalation Ahead of Trade Summit Negotiations

An American employee of the U.S. Commerce Department’s Patent and Trademark Office (USPTO), reportedly a military veteran, has been blocked from leaving China since April after traveling to Chengdu to visit family. According to reports by The Washington Post and South China Morning Post, the individual is subject to an “exit ban” for not disclosing his government position on a visa application a claim that some U.S. sources suspect may be politically motivated.

The case surfaces at a critical juncture: Washington and Beijing are attempting to organize a high-stakes leaders' summit between President Donald Trump and Chinese President Xi Jinping to negotiate tariffs, rare earths access, tech curbs, and Taiwan-related concerns. The Trump administration has recently softened its anti-China rhetoric in hopes of reviving trade dialogue, and both Secretary of State Marco Rubio and his Chinese counterpart have publicly endorsed the summit’s possibility.

Growing Risks for U.S. Businesses and Multinational Staff

The U.S. has escalated its response by issuing a “very high-level” diplomatic message to Beijing, demanding the employee be allowed to return home. However, the Chinese government has reportedly cited national security as the basis for the travel restriction. No official Chinese comment has been released, and the U.S. Embassy reiterated its deep concern over “arbitrary exit bans” and their strain on bilateral relations.

This incident comes on the heels of Wells Fargo’s decision to halt travel to China after one of its trade finance executives, Chenyue Mao, was also barred from leaving the country. These back-to-back cases have alarmed U.S. firms with ties to China. Jeremy Chan of Eurasia Group warned the developments “will have a chilling effect” on U.S. business travel to China, particularly as Trump’s team plans to bring CEOs to the upcoming summit. Executives may now hesitate to attend.

Exit Bans Reflect a Broader Pattern of Enforcement

China’s exit bans are not new but have become more visible amid geopolitical friction. A 2022 academic study documented 128 foreign cases, with over one-third tied to commercial disputes. The latest incident reinforces the perception of China as a high-risk jurisdiction, especially for foreign staff. In previous years, executives from UBS, Kroll, and other firms have been similarly detained.

Chinese law permits exit bans for individuals under criminal suspicion or accused of endangering national security. These powers were further expanded under the updated espionage law. While legal domestically, their arbitrary application often undermines business confidence and raises diplomatic tensions.

A Fragile Window for De-escalation

The blocked Commerce Department official may now represent more than a consular dispute. His continued detention could jeopardize the broader effort to stabilize U.S.–China relations and secure a face-to-face meeting between the two presidents. The outcome will signal how committed each side is to compromise amid increasingly nationalist policy agendas and growing distrust.

For American corporations with operations or staff in China, the takeaway is sobering. Despite the size of the Chinese market, rising legal unpredictability and geopolitical entanglements are making engagement riskier both for business and personnel. As Beijing doubles down on national security enforcement, the question is whether diplomatic or economic logic will ultimately prevail in shaping China's foreign posture.

Source: Bloomberg

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Pepperstone

Economic

WHERE WE STAND – Even by the standards of recent Fridays, the end of last week was a pretty dull one.

Not, I must say, that you’ll find me complaining – these days, we should take full advantage of any calm we get, however brief!

Anyway, as for catalysts as the week came to an end, there really weren’t any notable ones. Trade, of course, remained in focus, even if the most notable news flow on that front was reporting that the Trump Admin. are pushing for a minimum tariff as high as 20% on goods from the EU. Once again, this feels like a threat which is firmly part of an ‘escalate to de-escalate’ strategy, especially as the 1st August tariff deadline looms ever larger.

We also had Fed Governor Waller reiterating his dovish stance, essentially confirming that he will dissent in favour of a 25bp cut at the July FOMC meeting. Waller’s argument for an immediate 25bp ‘insurance’ cut appears to centre around the ‘frozen’ nature of the labour market, where firms have slowed hiring, but simultaneously haven’t notably accelerated the pace of layoffs. The issue, here, is that the argument falls apart when one considers that the reason for that labour market inertia is trade uncertainty, and not the cost of credit. To be honest, not that I’d recommend it, but you could probably lower the fed funds rate by 100bp or so, and it wouldn’t really have much, if any, impact on the employment backdrop, unless and until we obtain some certainty on the tariff front.

In any case, there really isn’t any data that points to the need for rate cuts. Friday’s housing starts, building permits, and UMich consumer sentiment figures all came in above consensus expectations, while last week also showed initial jobless claims falling to a 4-month low in the week ending 12th July, as headline CPI accelerated to 2.7% YoY. All of this supports the consensus view among FOMC members, that a ‘wait and see’ approach remains appropriate for now, with the resilient nature of the economy giving policymakers space to stand pat, awaiting further data to ensure that any tariff-induced inflation does indeed prove temporary. My base case is that we get just one 25bp cut this year, probably in December.

As for markets, the price action as we cruised into the weekend was very much akin to watching paint dry. I promise I’m not complaining about that, but it does feel like ‘summer markets’ vibes are starting to set in, with conditions really beginning to thin out as participants swap the desk, for the beach. This sort of a market tends to create relatively tight ranges, and price action that becomes quite technically-driven – a macro strategist’s nightmare! Typically, ‘summer markets’ run until Labor Day, so I suppose we best get used to it.

In any case, the path of least resistance for equities continues to lead to the upside, despite stocks ending the week with modest losses, amid a bout of pre-weekend de-risking. A resilient underlying economy, solid earnings growth, and progress towards trade deals being made should be a strong enough combination to keep the bulls in the driving seat, even if seasonality at this time of year is a bit of a headwind.

Elsewhere, things were also pretty contained. Treasuries found some demand, led by the belly of the curve, though dip buyers were also present at the long-end, as benchmark 30-year yields retreated back under 5%, ending a 3-day run north of that figure, which had equalled the longest such stretch since before the GFC. I wonder if this week’s relatively barren data docket may encourage a few more of those dip buyers to enter the fray, locking in yield before we get to the July FOMC meet, which is the next obvious risk event on the horizon.

The FX space, meanwhile, was more akin to a random walk than anything else, with the greenback – and pretty much all G10s – ending the day near enough where they started it. My base case remains for a slow but steady decline in the greenback over the medium-term, as cash continues to find a home elsewhere amid continued threats towards Fed independence. The repeated failure of the DXY to crack the 50-day moving average to the upside support my bearish stance, and I remain a dollar rally seller here.

LOOK AHEAD – As alluded to, the week ahead really doesn’t bring the most exciting economic docket that one has ever seen. In fact, for the first three days of it, I struggle to find anything at all to get especially excited about.

The July ECB decision, on Thursday, is arguably set to be the highlight of the week, though policymakers are near-certain to stand pat, holding the deposit rate at 2.00%. Guidance should also be unchanged, as the Governing Council stick with a ‘data-dependent’ and ‘meeting-by-meeting’ approach, sticking with that age old European tradition of not wanting to rock the boat too much before disappearing on a 2-months long summer break!

On the data front, July’s ‘flash’ PMI surveys are the most notable release, and should show a modest improvement in output in both the manufacturing and services sectors across DM. Elsewhere, the latest UK borrowing and retail sales stats are due, as well as the July IFO sentiment surveys from Germany. Friday’s US durable goods orders figure, meanwhile, should be entirely ignored, with the data having been horrifically skewed by a surge in Boeing orders in May, thus providing little-to-nothing in terms of signal.

Finally, earnings season continues this week, with reports from Alphabet and Tesla the standout releases, both coming after the close on Wednesday. Thus far, 83% of S&P 500 firms to report, have surprised to the upside of consensus EPS expectations.

Source:Pepperstone

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Gerik

Economic

Commodity

Fed Uncertainty Boosts Gold Appeal

Gold’s latest gains reflect growing investor confidence that US interest rates may decline in the near future. The precious metal, which offers no yield, becomes more attractive when borrowing costs fall. This sentiment gained traction after Fed Governor Christopher Waller openly supported a rate cut last week, followed by Governor Michelle Bowman showing openness to such a move. However, other Fed members remain cautious, warning that Trump’s aggressive tariff policies could stoke inflation, forcing the central bank to stay on hold or even tighten again.

This policy split comes at a politically charged moment. President Trump is reportedly exerting mounting pressure on Fed Chair Jerome Powell, whose term ends in May 2026. While Trump denied recent claims that Treasury Secretary Scott Bessent advised against firing Powell, the president’s open search for a dovish successor is keeping markets on edge and strengthening gold’s safe-haven status.

Tariff Tensions and Geopolitical Risks Underpin Demand

Gold’s year-to-date rally now over 25% has been powered by more than just Fed expectations. Global trade anxieties are escalating as Trump’s August 1 tariff deadline looms. The European Union is scrambling to prepare for a potential “no-deal” scenario, while other US trade partners race to strike favorable terms. These growing frictions, paired with the dollar’s recent softening, have reinforced investor interest in gold and other tangible hedges.

Despite climbing to near-record levels, gold has largely remained within a relatively tight trading band in recent months. Investors are weighing opposing forces: the inflationary potential of global tariffs versus the deflationary drag of slowing demand and manufacturing activity. In such an ambiguous macroeconomic environment, gold’s appeal lies in its resilience across policy outcomes.

Gold to Stay Bid Amid Mixed Signals

As of early afternoon trading in Asia, spot gold stood at $3,368.35 an ounce, with silver, platinum, and palladium all recording similar gains. Meanwhile, the Bloomberg Dollar Spot Index dipped slightly, further supporting gold’s uptick.

Looking ahead, gold prices are likely to remain sensitive to developments on three major fronts: the Federal Reserve’s stance on rate cuts, clarity around Trump’s tariff execution, and ongoing geopolitical strains. Any firm commitments by the Fed to easing, or concrete tariff escalations, could trigger breakout moves for gold above its current range.

Until then, the metal’s steady climb reflects a market caught between policy divergence and political volatility a setup where gold remains a favored insurance policy.

Source: Bloomberg

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Gerik

Economic

Japanese Markets Dark Amid Political Shake-up and Tariff Threats

Tokyo’s financial markets remained closed for a holiday, but political developments are already shaping investor outlook. The Liberal Democratic Party, led by Prime Minister Shigeru Ishiba, lost control of both parliamentary chambers for the first time since 1955, signaling a historic shift. Although Ishiba pledged to stay in power, the election reflected deep public dissatisfaction with inflation and governance, prompting expectations of increased fiscal stimulus. However, analysts warned that greater spending may worsen Japan’s already substantial national debt.

Compounding concerns, negotiations with the United States over looming 25% tariffs have shown little progress. With the Trump administration firm on its August 1 deadline, fears of prolonged trade friction could add pressure to Japan’s already unstable economic and political environment. Analysts at BMI predict that unless snap elections are called, policy inertia and leadership uncertainty may extend well into 2026.

China Gains as Leadership Maintains Policy Stability

In contrast, Chinese markets gained modest ground after the People’s Bank of China left its one-year and five-year loan prime rates unchanged. The Shanghai Composite edged up 0.4% to 3,549.89, and Hong Kong’s Hang Seng index added 0.3% to 24,895.20. The decision to hold rates reflects recent strength in economic data, which has reduced pressure on the government to inject fresh credit stimulus.

Investor optimism was also supported by signs of reduced tension with the U.S. on trade, as the Trump administration has tempered its recent criticism of Beijing. Market participants now hope this softer tone may open the door to a negotiated solution before new U.S. tariffs are enacted.

South Korea and Others Show Mixed Signals

South Korea’s KOSPI rose by 0.5% to 3,205.71 after government data showed a slight improvement in June exports, a critical measure for the trade-driven economy. Meanwhile, Australia’s S&P/ASX 200 fell 1.1% to 8,659.50, reflecting pressure from weaker global commodity demand. Taiwan’s Taiex dropped 0.3%, and Thailand’s SET lost 0.5%. India’s Sensex managed a 0.2% gain, driven by financials and consumer stocks.

U.S. stocks finished Friday mixed, but strong enough to lock in a third weekly advance. The S&P 500 barely moved after hitting a record high the previous session. The Dow Jones fell 0.3%, while the Nasdaq edged up slightly. Corporate news dominated: Norfolk Southern surged 2.5% on merger talks with Union Pacific, though the latter fell 1.2% amid antitrust concerns. In contrast, Netflix dropped 5.1% despite strong earnings, and ExxonMobil tumbled 3.5% following an arbitration ruling that allowed Chevron’s $53 billion acquisition of Hess to proceed.

Inflation Expectations Ease, but Tariff Effects Loom

Preliminary data from the University of Michigan showed U.S. consumers now expect 4.4% inflation in the coming year, down from 5%, a development that softened Treasury yields and relieved some pressure on the Federal Reserve. Still, the market is wary of rising costs driven by Trump’s broader tariff plans, which are set to begin on August 1. Many countries are scrambling to secure exemptions or make last-minute deals.

Oil prices rose slightly, with U.S. crude at $66.19 and Brent at $69.38 per barrel. In currency markets, the dollar strengthened to 148.50 yen, while the euro dipped to $1.1628.

While Wall Street’s continued resilience offered some support, Asian markets remain weighed down by regional uncertainties. Japan’s political transition and trade tensions, China’s delicate balance between stability and stimulus, and the ever-present threat of escalating tariffs are likely to keep risk appetite in check. As earnings season continues and trade talks intensify, market participants are bracing for increased volatility in the weeks ahead.