Who Owns France's Debt and Why It Matters

Bond

Economic

Summary:

President Emmanuel Macron's shock snap election has rocked France's bond market...

President Emmanuel Macron's shock snap election has rocked France's bond market, the largest in the euro zone, as a strong showing for the far right- and left-wing parties in opinion polls exacerbates concerns about fiscal sustainability.

Earlier in June, the risk premium France pays for its debt on top of Germany's neared levels last seen in 2012, during the euro zone debt crisis.

The question is how much more turmoil the two-round elections on June 30 and July 7 could sow in bond markets.

Here is a look at who holds France's government debt, key to how markets may react to any further political turmoil: Who Owns France's Debt and Why It Matters_1

Who Owns France's Debt and Why It Matters_1

Kindness Of Strangers

Foreign investors own around 50% of France's overall government debt, much higher than around 28% in Italy, 30% in the U.S., 40% in Spain and 45% in Germany, according to data from Barclays and the U.S. Treasury.

Foreign investors "are known to be quite volatile. Whenever there are issues, they get out of the market very, very quickly," said BofA rates strategist Erjon Satko.

The high share of foreign ownership could mean it takes longer for France's borrowing costs to settle, Satko added.

French borrowing costs initially jumped after Macron called the election. While markets have settled, the premium over Germany is still more than 20 bps wider than before the election announcement as spending plans from both Marine Le Pen's far-right National Rally and a left-wing alliance have spooked investors.

Foreign non-bank investors, whether asset managers, pension funds or hedge funds, have been the biggest buyers of French bonds since mid-2022, when the ECB started raising interest rates, Barclays notes.

And hedge funds - speculative investors that bet on price swings - accounted for just over 50% of French government bond trading volumes on electronic platform Tradeweb last year, as they became the dominant players across euro zone government bonds for the first time. Who Owns France's Debt and Why It Matters_2

Who Owns France's Debt and Why It Matters_2

Repeat of 2017?

A big focus is Japanese investors - big buyers of foreign bonds, with most of their European holdings in France.

Le Pen's pledges - now shelved - to pull France out of the European Union and euro rocked markets seven years ago. Ahead of France's 2017 presidential election, which Le Pen lost to Macron, Japanese investors sold some 26 billion euros ($27.89 billion) of French government bonds - a record - Barclays said.

"There is a potential risk that you have some recurrence of the dynamics that you saw back in 2017," Barclays rates strategist Max Kitson said.

Last week, Japan's Norinchukin Bank said it plans sell around 10 trillion yen ($62.6 billion) of U.S. and European government bonds to stem losses from bets that went awry given higher-for-longer overseas interest rates.

Historically high currency hedging costs increase the risk of another round of Japanese selling after stable holdings for 15 months, Citi analysts reckon. Who Owns France's Debt and Why It Matters_3

Who Owns France's Debt and Why It Matters_3

No Doom Loop

French banks own just 7.7% of the country's debt, according to data from the country's debt management agency that takes into account fluctuations in the bonds' prices.

That's less than the 9.8% recorded in 2014, after which the European Central Bank hoovered up euro zone government debt.

Crucially, their domestic government debt holdings are also low relative to their assets, around 4% at the end of 2023, compared to around 16% in Italy and just under 10% in Spain, according to Deutsche Bank.

"That's actually an advantage, because you can encourage domestic banks to buy more of the French government bond market if need be," Swiss Re's head of macro strategy Patrick Saner said.

It also lessens the risk of government debt ructions spilling over into French banks, Saner added. A bank-sovereign bond "doom loop" was at the heart of the euro zone debt crisis.

That's good news for French lenders, the biggest three of which have seen their shares fall 9-14% since Macron called the election.

To bring their investments back to pre-2015 levels, euro zone banks overall could buy an additional 616 billion euros of French debt across asset classes, BofA estimated late last year.

Similarly, French insurance companies now hold 9.5% of the country's debt, down from 19.7% in 2014, according to the French debt management agency data.

BofA's Satko said there was room for domestic investors to up their holdings of French debt.

"For them it will mostly be about getting the timing right." Who Owns France's Debt and Why It Matters_4

($1 = 0.9322 euros)

Source: Reuters

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Cohen

Economic

Forex

"Because it's France" was how Jean-Claude Juncker, European Commission president at the time, explained Brussels' decision in 2016 to give leeway to the large, founder member of the European Union on the bloc's budget rules.

That patience continued even as the EU endured a sovereign debt crisis that almost sunk the euro and forced smaller, more indebted nations such as Greece and Portugal to adopt swingeing austerity measures.

But any indulgence for French exceptionalism may come to an end if France's snap election produces a eurosceptic, far-right government in Paris that could strain ties with other European capitals and test the very foundations of the euro project.

Marine Le Pen's National Rally (RN) insists it would not blow up the French budget. But questions persist about how it would fund costly spending plans within the eurozone's newly minted budget rules and whether the European Central Bank could step in to help if financial markets turn on France.

"If a country can just ignore the rules and be helped by the central bank, you'll get a lot of doubts about the future value of the euro and the future cohesion of the euro," said Holger Schmieding, an economist at Berenberg.

Such concerns are not on the official agenda of Thursday's EU summit. But with the RN leading polls in the two-round vote starting June 30, they are bound to occupy the minds of President Emmanuel Macron's fellow leaders.

Senior German government sources said they were dismayed by Macron's surprise decision to call elections that could usher in an RN-led government. One compared it to former UK premier David Cameron's ill-fated gamble on an "in-out" Brexit referendum.

In Italy, with an even bigger debt pile than France, a tinge of Schadenfreude over France's misfortunes is offset by fears that a French crisis could extend across the Alps, said Francesco Galietti of Rome-based political risk consultant Policy Sonar.

Otmar Issing, the ECB's first chief economist and one of the euro's architects, compared the debt of Italy and France to "a sword of Damocles hanging over the monetary union", bound to fall unless the problem is tackled.

"You can pull the hair by which it is attached but it cannot hold for ever," he said in an interview.

Even Greece is not cutting France any slack, with central bank governor Yannis Stournaras stressing that all member states needed to respect EU rules.

No More Indulgence

Polling points to the RN emerging as the largest party, with or without a clear majority to pursue an awkward "cohabitation" with Macron until the 2027 presidential election.

France's fiscal credibility is already at stake with the International Monetary Fund questioning how it will reduce a budget deficit running at around 5.1% this year and its credit rating downgraded by two agencies.

In truth, France's fiscal sins far pre-date Macron. It has run budget deficits greater than the EU-mandated 3% for most of the 25 years since those rules came into force.

Brigitte Granville, economist at London's Queen Mary University and author of "What ails France?", said its rejection in the 1990s of German proposals for more complete political union reflected a desire to retain sovereignty over its finances.

She expected the RN, which long ago dropped calls to leave a single currency broadly accepted by French voters, to moderate its plans just enough to please Brussels if it came to power.

"They don't have a choice unless they want to leave the euro," Granville said in an interview.

RN statements to that effect have reassured investors, who were demanding a premium of just 70 basis points to own 10-year French bonds rather than their safer German counterparts - a far cry from peaks of 190 points for France and nearly 560 points for Italy during the 2011 debt crisis.

ECB chief economist Philip Lane told Reuters the moves in the French bond market did not appear "disorderly", meaning they don't meet one of the conditions for the central bank's intervention.

Cautionary Tales

Observers point to cautionary tales ranging from Greece, where a leftwing government was brought to its knees by financial and political pressure, to Britain, where Prime Minister Liz Truss was forced to resign after unveiling a budget that unnerved investors.

Most analysts emphasise the ECB has the tools to stem contagion from a French crisis by buying bonds of other countries that do respect the EU's fiscal framework, meaning Paris might find itself isolated at times of need.

"There is, of course, a possibility that Frankfurt would intervene if the problems with France were to have some kind of external negative effects on other countries, like Italy," former ECB policymaker Ewald Nowotny said.

An EU official cited Rome as a model for Paris after Prime Minister Giorgia Meloni toned down her anti-EU rhetoric once elected in 2022.

This, along with her support for the EU's stance on conflicts in Ukraine and Gaza, has helped Italy keep the Commission and financial markets on-side despite repeatedly raising its deficit forecasts.

Jeromin Zettelmeyer, director of the Bruegel economics think tank in Brussels, said RN's rhetoric thus far did not suggest it was seeking a major confrontation with the Commission that could trigger a financial crisis.

However he said that if its officials ended up running key ministries, they could hamper EU moves to reform energy markets, advance the green transition and boost the bloc's competitiveness by reforming its capital markets.

"If the far-right gets elected that is bad news for EU integration because they would control the government positions involved in most dimensions of EU policy-making,' he said.

"The question is whether that is reversible or existential."

Source: Reuters

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Devin

Economic

Thanks in part to former UK Prime Minister Liz Truss' singular contribution to financial stability two years ago, Britain is proving something of an exception among major economies heading for elections this year - there's little or no fiscal or financial controversy.

And perhaps the Truss episode is even reining in other G7 countries too by neatly having illustrated exactly what not to do if you want to gain or stay in power and don't want to scare the horses. Even the French far right are softening their tone as weekend polls near - just in case.

Following a late 2022 budget farce during the brief tenure of the erstwhile UK Prime Minister - when UK government bonds and sterling almost imploded following a hasty, unfunded tax and spending giveaway - neither major British party now dares to suggest it's veering from the fiscal straight and narrow.

And it pitches chastened Britain as something of an outlier among peers heading to the multiple elections this year - despite a likely change of government for the first time in 14 years and what opinion polls suggest will be a landslide 200-seat majority for the opposition Labour Party on July 4.

Remarkable in that looming change of government is the fact that Labour offers few fiscal teasers and has relied largely on the mounting unpopularity of the incumbent conservatives - with the latter's lasting signature legacy of Brexit now even rejected by a majority of the electorate who wanted it.

For global investors, the change of government appears to be welcomed with open arms.

And in a world facing the uncertainty of possible second U.S. presidential term for Donald Trump come November or the far right and far left vying for a parliamentary majority in France over the next fortnight, Britain suddenly seems like an unlikely haven of stability.

Despite the prospect of Labour returning with the biggest majority since World War Two, Dutch bank ING described the poll as a 'non-event' for markets - so you get the picture.

This outcome has been long expected, appears to ruffles few feathers and may even be welcomed widely by overseas funds as a shift away from the serial economic fractures, financial crises, leadership switches and internal government rebellions.

Just 10 days from the election, the Bank of England's trade-weighted sterling index is close to its highest since the Brexit referendum in 2016 - almost 25% up from the nadir of the Truss budget.

Historical 30-day volatility of that index is less than a fifth of the peaks it hit two years ago and around the pandemic.

It's a similar picture for the blue-chip FTSE10, which is just shy of record highs set last month and clocking one-month volatility less than half its 10-year averages.

Ten-year gilts - and the heart of any fiscal concern - are a different matter.

But despite the hit from post-pandemic inflation and Bank of England interest rate rises, yields and volatility have subsided there this year too and the risk premium over Germany has fallen by about 100 basis points from the Truss blowout peaks. Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_1

Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_1

Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_2

'Mercifully short'

Buoyant world markets may have something to do with that picture. But relative UK positioning by global funds has improved markedly even as Labour poll leads mounted.

The June global fund manager survey from Bank of America, for example, shows investors a net 12% underweight UK equities - but that's 0.3 standard deviation above the long-term 20-year average.

Similarly, only a net 5% of fund managers think the pound is still undervalued - just 0.3 standard deviation below the long-term average valuation.

And the view from many overseas investors about a change of government is sanguine at worst.

Franklin Templeton Institute Investment Strategist Kim Catechis described the feeling as one of "cautious optimism" - after a torrid decade of Brexit, the pandemic, rising interest rates, five prime ministers and seven finance ministers.

Echoing ING's take, Catechis said the 'mercifully short' six week election campaign was "unusual in its blandness".

This, he reckons, sidesteps the real issues and perhaps puts off harder decisions needed to disentangle the UK economy from a net of weak growth, weak productivity and high inequality.

"Both main parties are ignoring the obvious point - that all remedies will require financing via debt or increased taxes, or both."

But the Franklin Templeton strategist said this was not a unique among major economies and said there was a degree of positivity among investors about the likely change of power.

"Capital markets appear to be positive about the prospect of a change of government - in the expectation that policy direction will be pro-growth but with a cautious approach to fiscal policy," he said.

"The fixed income market recognizes that the Labour Party must be keen to serve two terms because the party's project cannot be delivered in four years - so fiscal orthodoxy is virtually guaranteed."

And this along with better relations with the European Union will buoy sterling. "A change of government, the perception of less friction in trade with the EU and ... the expectation of stability and orthodox policy direction could provide further support to sterling this year," he concluded.

Long-unloved UK markets may be in for a rare period of political calm even though that may leave them out of step again with most restive peers - though this time for positive reasons. Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_3

Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_3

Out of Step Again, Uncontroversial UK Govt Switch Sows Relief_4

Source: Reuters

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Cohen

Economic

For decades the dollar has held a position of unparalleled dominance in international trade and finance. The petrodollar system, established in the 1970s, cemented this status, creating a world in which oil and other commodities were traded exclusively in dollars. However, recent geopolitical shifts and the rise of alternative currencies signal a potential end to this era.

The petrodollar system was born in 1974, three years after the collapse of the Bretton Woods agreement, which had pegged major currencies to the dollar, itself convertible to gold. In a masterstroke of diplomacy, then US secretary of state Henry Kissinger secured an agreement with Saudi Arabia, ensuring that oil would be traded exclusively in dollars. This arrangement was mutually beneficial. The US guaranteed military protection for the Saudi kingdom, while Saudi Arabia and eventually all OPEC countries agreed to price their oil in dollars and invest their surpluses in US debt.

This system reinforced the dollar's position as the world's primary reserve currency. Countries needed dollars to purchase oil, ensuring constant demand. However, this set-up also made the global economy heavily reliant on the dollar, tying international financial stability to the fortunes of the American economy.

In recent years several factors have catalysed a shift away from dollar dominance. Geopolitical tensions, particularly between the US and countries such as China and Russia, have prompted these nations to seek alternatives to reduce their exposure to US financial influence. For instance, in 2023 Saudi Arabian finance minister Mohammed al-Jadaan announced at the World Economic Forum that the kingdom was open to trading in other currencies, including the Chinese yuan.

This move was indicative of a broader trend. Countries such as Russia and China have been actively promoting their currencies in international trade. Russia, facing Western sanctions, has increasingly used the yuan for its oil exports. Similarly, China's Belt & Road Initiative encourages the use of the yuan in trade, further challenging the dollar's dominance.

Not unprecedented

The rise of cryptocurrencies such as bitcoin offers a decentralised alternative to traditional currencies. Bitcoin's appeal lies in its borderless nature and resistance to government control, making it an attractive option for countries and individuals looking to bypass the dollar-centric financial system.

The decline of the dollar as the global reserve currency would not be unprecedented. History is replete with examples of dominant currencies losing their status. The Portuguese real, the Spanish real, the Dutch florin and the British pound all enjoyed periods of dominance before being supplanted. Each of these transitions was driven by a combination of economic, political and technological changes.

The pound was the world's reserve currency until the mid-20th century. The aftermath of World War 2 and the economic rise of the US facilitated the dollar's ascension. Similarly, shifts in global economic power, technological advancements and geopolitical realignments are creating conditions ripe for another transition.

A move away from the dollar would have profound implications for the global economy. One immediate consequence could be increased volatility in financial markets. As countries diversify their reserves away from dollars, demand for US treasuries could decline, leading to higher borrowing costs for the US government. This could worsen fiscal challenges and potentially lead to a weaker US economy.

For the global economy, dedollarisation could mean a more fragmented financial system. A multipolar currency world may emerge, in which the dollar, euro, yuan and possibly cryptocurrencies share the role of global reserve currencies. This could lead to increased transaction costs and complexity in international trade and finance.

Protect wealth

Bitcoin presents a compelling alternative to traditional fiat currencies. Its decentralised architecture ensures it is not subject to the whims of any government. Bitcoin's finite supply, capped at 21-million coins, provides a hedge against inflation, a stark contrast to fiat currencies, which can be printed at will by central banks. As more institutional investors and countries recognise bitcoin's potential as a store of value and medium of exchange, its adoption is likely to increase. The trading of bitcoin on digital global platforms such as PrimeXBT, where crypto traders can trade perpetual contracts, contracts for difference and foreign exchange has also been on the rise.

As the global financial landscape evolves, individuals and investors need strategies to protect their wealth. Diversification is key. Allocating assets to a mix of traditional currencies, cryptocurrencies such as bitcoin and other assets such as gold can mitigate the risks associated with the debasement of any single currency.

Additionally, investing in decentralised finance platforms offers exposure to innovative financial products that operate outside traditional banking systems. These platforms provide opportunities for earning interest, borrowing and lending in a decentralised manner, further insulating investors from the risks associated with fiat currency debasement.

The decline of the dollar's dominance is not an overnight phenomenon but a gradual process influenced by geopolitical, economic and technological changes. As countries seek alternatives to the dollar the global financial system is poised for significant transformation.

While the exact trajectory of this transition remains uncertain, one thing is clear: the era of unquestioned dollar dominance is waning. In this new landscape, adaptability, diversification and a keen understanding of emerging financial technologies will be crucial for navigating the challenges and opportunities that lie ahead.

The shift, driven by geopolitical realignments and technological advancements, will reshape the global economic landscape, creating challenges and opportunities for countries, businesses, and individuals. Embracing these changes and adopting proactive strategies will be essential for thriving in this evolving financial ecosystem.

Source: Business Day

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Central Bank

Economic

Macron’s gamble set to backfire

Political risks came back to haunt the euro in June as the resurgence in popularity for far-right parties sparked jitters in financial markets. France has been at the centre of this resurgence where Marine Le Pen’s National Rally party is on course to repeat its success in the European elections in the country’s legislative vote. The first round of the election takes place on Sunday, June 30, with the second round due a week later.

Most polls show that President Macron’s decision to call snap elections in the likely hope of forming a new coalition against the far right will not pay off. But markets are no longer as worried about a far-right government as they were in the immediate aftermath of the European election results. The National Rally party appears to have shifted towards the mainstream in its bid to appeal to more voters and secure an absolute majority, rowing back on some of its more radical pledges. It’s even said it will abide by the EU’s fiscal rules, which has been music to investors’ ears.

Week Ahead – French and UK Elections on the Horizon, US Jobs Report Eyed Too_1

A bigger problem now for the markets is the possibility of the left-wing coalition leading the next government, which is more likely to spend recklessly and trigger a Liz Truss-style debt crisis. The left-wing alliance has overtaken Macron’s Ensemble coalition in the polls so should it come a close second after the National Rally, it could be in a position to form the next government.

Markets seem just as worried about the prospect of political paralysis in the event of a hung parliament. Even if the major parties were to put their differences aside and agree to a unity government to end a stalemate or keep the far right out of power, there is a danger that it may not survive long, hence the nervousness in the markets.

Will flash CPI boost ECB cut bets?

A strong showing for the National Rally could send the euro as well as French stocks and bonds lower on Monday in a knee jerk reaction before potentially rebounding, whereas a better-than-expected outcome for the other parties might initially be seen as positive before caution sets in.

Uncertainty about the French elections as well as concerns about political stability in other Eurozone countries has already started to weigh on business confidence and should that begin to hurt the growth outlook, the European Central Bank would be less likely to hesitate to cut interest rates again.

On that front, policymakers will be closely monitoring Tuesday’s flash CPI readings for the euro area following the surprise uptick in May in the headline figure to 2.6% y/y. The forecasts point to a small drop to 2.5% in June, which if confirmed, the euro could come under slight pressure as traders would raise their bets of a September cut.

Week Ahead – French and UK Elections on the Horizon, US Jobs Report Eyed Too_2

But investors will be just as interested to hear what Lagarde & Co. will have to say on the price outlook during the three-day forum on central banking organized by the ECB in Sintra, Portugal. Fed officials, including Chair Powell will also be in attendance and take part in a panel discussion with President Lagarde on Tuesday.

UK’s Labour expected to win landslide

Across the Channel, there is less uncertainty surrounding the outcome of the UK general election on Thursday. Prime Minister Rishi Sunak has failed to turn the ruling Conservatives’ fortunes around despite a hard-fought campaign. The opposition Labour party are riding high in the opinion polls and could even win a supermajority.

As appealing as a stable government is for sterling right now given how tumultuous the past few years have been under the Tories, a weak opposition might worry some investors. There is a risk that the Conservatives might even be beaten to third place, losing out to Britain’s own far-right party, Reform UK, led by Brexiteer Nigel Farage.

Week Ahead – French and UK Elections on the Horizon, US Jobs Report Eyed Too_3

However, it’s also possible that the Tories might do somewhat better than the polls suggest, giving Labour a narrower victory, and this could be positive for UK assets. But the real test for the pound will probably come after Keir Starmer has settled into Number 10 and the new finance minister, expected to be Rachel Reeves, has started to outline more details about Labour’s economic agenda.

Will NFP and ISM PMIs spoil the dollar’s bullish run?

With both the euro and pound gripped by domestic politics, investors are only slowly turning their attention to the upcoming US presidential election and monetary policy continues to be the dominant theme for the US dollar. The recent encouraging data on inflation as well as the signs of a slowdown in consumer spending and the housing market have bolstered hopes of a September rate cut by the Fed even though policymakers don’t yet seem convinced.

The ongoing tightness of the labour market is probably the main reason why the Fed is reluctant to drop its hawkish bias and Friday’s jobs report might not do much in changing that. Nonfarm payrolls are projected to have increased by 180k in June, which would be down from 272k in the prior month but still considered as a solid print.

Week Ahead – French and UK Elections on the Horizon, US Jobs Report Eyed Too_4

The unemployment rate is forecast to have remained steady at 4.0% in June, while average hourly earnings are expected to have risen by 0.3% m/m versus 0.4% in May.

Ahead of the NFP release, there will be other gauges on the labour market, including the JOLTS job openings and Challenger layoffs on Tuesday, as well as the ADP employment report on Wednesday. In addition, the minutes of the June FOMC meeting will be published on Wednesday and may reveal more on policymakers’ thinking after most pencilled in just one cut for 2024 in the latest dot plot.

Should investors fail to get much clarity from the job indicators, they will focus more on the ISM PMIs. The manufacturing PMI is out on Monday and the services PMI follows on Wednesday.

The former is forecast to edge up to from 48.7 to 49.0, while the latter is expected to dip from 53.8 to 52.0. A weaker services PMI would be positive for Wall Street, as long as it doesn’t decline more than anticipated. But more importantly, markets will be hoping to see a deceleration in factory gate inflation.

The dollar is vulnerable to a selloff should the incoming data be broadly on the soft side following the steady gains over the past month.

Loonie and kiwi on data watch ahead of July rate decisions

Canada will also see the release of jobs numbers on Friday, which could prove crucial for the Bank of Canada’s July policy decision. Expectations for a rate cut next month fell sharply after the hotter-than-expected May CPI figures. Wage growth is also a bit of a concern as it accelerated to 5.2% y/y in May. Any moderation in June could lift the odds of a back-to-back rate cut, pulling the Canadian dollar lower.

Week Ahead – French and UK Elections on the Horizon, US Jobs Report Eyed Too_5

In the bigger picture, Canada’s labour market has been slowly cooling, with the jobless rate edging up from 2022’s post-pandemic lows, despite a healthy rise in employment.

In New Zealand, the kiwi will be keeping an eye on Tuesday’s NZIER business confidence gauge as the RBNZ’s next policy decision approaches on July 10, while its aussie cousin will be watching PMI numbers out of China.

The official manufacturing PMI due on Monday is expected to hold unchanged below 50 at 49.5 in June, but the Caixin equivalent is forecast to have eased slightly to 51.2.

Adding to Monday’s unusually busy start to the week is the Bank of Japan’s quarterly Tankan business survey. The outlook by businesses was likely little changed compared to the previous survey but which nevertheless doesn’t reflect the sluggish growth seen in the hard data. So, signs of ongoing optimism may offer the battered yen a supportive hand.

Source:XM

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Kevin Du

Economic

Energy

A nearly 18% jump in hydro-powered electricity output during January through May from the same months in 2023 has helped boost Europe's clean electricity generation to new highs.

Electricity generation from hydro dams across Europe was 388 terawatt hours (TWh) from January through May of 2024, according to energy think tank Ember.

That total compares to 330 TWh during the same months last year, and is the highest for that five-month window in at least nine years following above-average rainfall across much of mainland Europe so far in 2024.

Along with record output from wind and solar farms, the high hydro generation total helped lift Europe's clean electricity generation to a record 1,260 TWh in January through May this year, which marks a 9.4% advance from the same months in 2023. Europe's Hydro Dams Lift Clean Electricity Output to New Highs_1

Europe's Hydro Dams Lift Clean Electricity Output to New Highs_1

Higher clean power output has allowed Europe's power producers to cut fossil fuel generated electricity production by more than 9% to its lowest cumulative total for the first five months of the year since at least 2015.

Lower fossil fuel use has in turn cut Europe's power sector emissions by around 9% to their lowest in over 9 years, Ember data shows.

Hydro Help

The recovery in hydro electricity generation has been seen throughout mainland Europe.

From January 1 through June 23, hydro generation in France - mainland Europe's largest hydro producer - was 3.7 million gigawatt hours (GWh), according to data compiled by LSEG.

That total marks a more than 50% rise from the 2.4 million GWh generated during the same period in 2023, and is 12% more than the long term average during that period. Europe's Hydro Dams Lift Clean Electricity Output to New Highs_2

Europe's Hydro Dams Lift Clean Electricity Output to New Highs_2

In Italy, hydro generation is up 49% for the same period in 2023 and 23.4% above the long term average, while Germany's hydro production so far this year is 44% above the long term average, LSEG data shows.

Hydro generation in the Alps catchment area - which is an aggregation of output across Austria, France, Italy and Switzerland - is up 40% from the same period last year and is 14.4% above normal.

Growing Share

For Europe as a whole, hydro dams produced 19.2% of total electricity generation during the first five months of the year.

That share compares to an average of 17% for the previous five years, and reveals that hydro power is accounting for an historically large portion of Europe's electricity in 2024. Europe's Hydro Dams Lift Clean Electricity Output to New Highs_3

Europe's Hydro Dams Lift Clean Electricity Output to New Highs_3

And thanks to the dispatchable nature of much of Europe's hydro power - meaning it can be distributed when needed across grids - power producers have been able to cut back on generation from fossil fuels.

From January through May, coal-fired generation is down 13.3% while natural gas-fired generation is down 7%, Ember data shows.

Europe's power firms are also making use of a 21.4% rise in solar generation and a 7.6% climb in wind output during the January to May window, driving total electricity generation up nearly 2% from the same period in 2024.

Seasonal trends suggest that Europe's hydro generation total may start to decrease over the coming months as the impact of snow melt wanes and several countries enter their driest period for the year.

But with solar generation set to keep climbing into the peak summer period, and output from nuclear plants and bioenergy facilities largely flat, Europe's cumulative clean generation total looks primed for further gains over the near term to help advance the region's continuing energy transition efforts.

Source: Reuters

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Economic

Forex

The ECB hawks are clearly upset

It has been three weeks since the first ECB rate cut, and the situation feels very different to a traditional monetary policy easing cycle. Under normal conditions, every meeting would be considered a “live” one with most ECB members happily singing the same tune. However, this is not the case at this juncture.

The main message from the June 6 ECB gathering was that President Lagarde et al made the first crucial step, but they need to see a plethora of data confirming the disinflation process in order to cut rates again. This statement captures the sentiment in the ECB hawks’ ranks. They feel that they were pinned in the corner and hence forced to agree on a rate cut in June without really being convinced of the need for such an action.

However, they voted in favour of the rate move as backing down from a barrage of dovish comments, mostly from ECB doves, would have dealt another very serious blow to ECB’s credibility. Thursday’s release of the ECB meeting minutes could shed more light on the difficult behind-the-door discussions.

The barrier for another rate cut is higher now

The end product of this growing dichotomy is that the barrier for the next rate cut is much higher now. A month of weak data will not lead to a cut as the hawks want strong evidence that inflation is slowing down, especially in the services sector. Therefore, they appear determined to block any rate cut discussions until September when the new ECB staff projections will be ready. As such, the July meeting is not expected to produce a surprise.

The doves, though, remain committed to further ease monetary policy. Comments from ECB members Rehn and Knot about three rate cuts being reasonable in 2024 means that the debate during the next ECB meetings, starting with the July 18 one, could be described as hostile with President Lagarde facing her toughest challenge yet.

Maybe the ECB forum on Central Banking held in Sintra, Portugal on July 1-3 could help mend some of the ECB members’ differences. In addition, with the far-right parties faring well in the recent European elections, the ECB will probably draw even more criticisms than praise going forward. Hence, it is imperative for the next ECB actions to be extremely well thought-out and have the unanimous backing of the entire ECB council.

Eurozone CPI Report: Further Noise or a Proper Signal to Cut Rates Again?_1

All eyes on the CPI report

At the end of the day, ECB members agree that the data will determine the ECB’s next steps. With the market most likely digesting the result of the first round of the French parliamentary election held this weekend, which could potentially unsettle even more the fragile European political scene, next week’s calendar starts on a high note.

The preliminary inflation report from Germany will be published on Monday with the Eurozone aggregate figures following on Tuesday. The final PMI surveys will also be released during the week with a decent chance of an upward revision in the German figures, but not in the French numbers as the local economy remains numb ahead of the parliamentary elections.

The market is currently expecting both the eurozone headline and core inflation rates to ease to 2.5% and 2.8% year-on-year respectively. The initial inflation prints from France, Italy and Spain point to a small possibility of an upside surprise to Tuesday’s prints. However, even in this case, the ECB doves will quickly try to dismiss the report. Chief Economist and Executive Board members Philip Lane has already been on the wires downgrading the importance of the monthly inflation reports, particularly when they are deemed to contain more noise than signaling power.

Euro remains under pressure as political risks linger

The euro remains on the backfoot against the US dollar as eurozone political risks linger and because the US continues to enjoy strong economic data that gradually push out the date of the first Fed rate cut. The outcome of the French elections could set the tone for next week, but the inflation report could quickly dictate the market moves.

A strong CPI report could help the euro reclaim the 1.0735 level and then tentatively open the door to a move towards the busier 1.0774-1.0796 area. On the flip side, a weak set of CPI prints might not increase the chances of a July ECB rate cut but it could add to the already negative market sentiment for the euro. A retest of the early April low at 1.0600 could reignite discussions about euro/dollar parity.