November 13th Financial News

Daily News

Summary:

Lagarde says the ECB will raise rates again if needed; Powell says the Fed is 'not confident' it has done enough to bring inflation down; U.S. 30-year mortgage rate retreats to 7.5%...

[Quick Facts]

1. Fed's Daly: Fed may hike rates again if growth and inflation persist.

2. Fed's Bostic: Fed doesn't need to keep raising rates.

3. Lagarde: ECB will raise rates again if needed.

4. Powell: Fed is 'not confident' it has done enough to bring inflation down.

5. U.S. consumer confidence index falls for the 4th consecutive month

6. U.S. 30-year mortgage rate retreats to 7.5%.

[News Details]

Fed's Daly: Fed may hike rates again if growth and inflation persist

The Fed may need to raise interest rates again if the economy grows strongly while inflation progress stagnates, said San Francisco Fed President Mary Daly in an interview on November 10 local time. Interest rates have been restricted enough to guide inflation back to the Fed's target level, but it remains full of uncertainty. Fed officials must stay flexible as they watch upcoming economic data releases to inform future interest rate decisions. Optionality has to be the metric of the day, Daly said.

Fed's Bostic: Fed doesn't need to keep raising rates

The Fed can reach the 2% inflation goal without more hikes, said Atlanta Fed President Raphael Bostic in a speech last Friday, November 10. Interest rates have been raised into restrictive territory, but the full impact of tightening has yet to be seen, so the Fed would be wise to wait a while.

Lagarde: ECB will raise rates again if needed

European Central Bank (ECB) President Christine Lagarde said on Friday that keeping the deposit rate at 4% should be enough to curb inflation. "If major shocks come up, depending on the nature of the shocks, we'll have to revisit that," she said. It is expected that inflation in the euro area could rebound from its two-year low it recently hit, especially if it suffers another energy supply shock. It is unlikely that interest rates will be cut in the next few quarters.

Powell: Fed is 'not confident' it has done enough to bring inflation down

Federal Reserve Chairman Jerome Powell said on November 10, local time, that he expected a long way to go in bringing inflation down to 2% on a sustained basis. The labor market remains tight, although the improving labor supply and gradually easing demand continue to bring it into better balance. GDP growth was quite strong in the third quarter, but like most forecasters, we expect growth to slow in the coming quarters.

We have noted the risk that stronger growth could undermine further progress in restoring balance to the labor market and lowering inflation, which may require a monetary policy response.

The Fed is not confident that it has done enough to bring inflation down to 2%. If it becomes appropriate to tighten policy further, we will not hesitate to do so.

We will continue to move carefully, allowing us to address both the risk of being misled by a few good months of data and the risk of overtightening.

The U.S. labor market recently has shown signs of a lack of momentum, but officials remain cautious about having raised interest rates enough to the restrictive level. The Federal Reserve "is not sure" whether interest rates have reached a critical point.

U.S. consumer confidence index falls for the 4th consecutive month

The University of Michigan consumer sentiment index for the U.S. continued to decline to 60.4 in November, being the fourth consecutive month of decline. While both current and expected personal finances improved slightly during the month, the long-term economic outlook slipped by 12%, in part due to growing concerns about the negative impact of high interest rates. The ongoing conflicts in Gaza and Ukraine also put pressure on many consumers. Overall, the confidence of low-income and younger consumers dropped the most.

U.S. 30-year mortgage rate retreats to 7.5%

Mortgage rates retreated, according to Freddie Mac's Primary Mortgage Market Survey (PMMS) released last Friday. 30-year fixed mortgage rates averaged 7.5%; they were 7.76% a week ago and 7.08% a year ago. 15-year fixed mortgage rates averaged 6.81%, compared to 7.03% a week ago and 6.38% a year ago.

With Treasury yields moving lower, 30-year mortgage rates fell by 0.25 percentage points, the largest one-week drop since last November. The new data shows that household debt continues to climb. The housing market will remain stagnant unless mortgage rates fall sharply.

[Focus of the Day]

UTC+8 16:15 ECB Vice President Luis de Guindos Speaks

UTC+8 00:05 Next Day: Bank of England MPC Member Mann Speaks

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Kevin Du

Palestinian-Israeli conflict

A plastic surgeon in Shifa said bombing of the building housing incubators had forced them to line up premature babies on ordinary beds, using the little power available to turn the air conditioning to warm

GAZA/JERUSALEM: Two more major hospitals in Gaza closed to new patients on Sunday, with staff saying that Israeli bombardment plus lack of fuel and medicine meant more babies and others could die.Hospitals in the north of the Palestinian enclave are blockaded by Israeli forces and barely able to care for those inside, medical staff said. Israel says it is homing in on Hamas militants in the area and the hospitals should be evacuated.Gaza’s largest and second largest hospitals, Al Shifa and Al-Quds, said they were suspending operations. With more people killed and wounded daily but half of the territory’s hospitals now out of action, there are ever fewer places for the injured.

Newborns are placed in bed after being taken off incubators in Gaza's Al Shifa hospital after power outage, amid the ongoing conflict between Israel and the Palestinian group Hamas, in Gaza City, Gaza November 12, 2023. (REUTERS)

“My son was injured and there was not a single hospital I could take him to so he could get stitches,” said Ahmed Al-Kahlout, who was fleeing south in accordance with Israeli advice while fearing that nowhere in Gaza was safe.A plastic surgeon in Shifa said bombing of the building housing incubators had forced them to line up premature babies on ordinary beds, using the little power available to turn the air conditioning to warm.“We are expecting to lose more of them day by day,” said Dr. Ahmed El Mokhallalati.Israel says Hamas has placed command centers under and near the hospitals and it needs to get at them to free around 200 hostages the militants took in Israel in an attack just over a month ago. Hamas has denied using hospitals in this way.On Sunday, a Palestinian official briefed on talks over the release of hostages said Hamas had suspended the negotiations because of the way Israel had handled Shifa hospital.There was no immediate comment from either Hamas or Israel.

’NO ONE IS ALLOWED IN, NOBODY IS ALLOWED OUT’Israel’s military said it had offered to evacuate newborn babies and had placed 300 liters of fuel at Shifa’s entrance on Saturday night, but that both gestures had been blocked by Hamas.Muhammad Abu Salmiya, director of Shifa, said reports of refusing to leave the diesel were “lies and slander.” Ashraf Al-Qidra, spokesperson for the Health Ministry in Hamas-controlled Gaza, said that of 45 babies in incubators at Shifa, three had already died.

Israeli army soldiers attend an armed first response group training session in the Druze village of Hurfeish, which has garnered the name "Tsahal village" (a Hebrew-language acronym for the "Israel Defence Forces"), near the border with Lebanon in northern Israel on November 10, 2023. (AFP)

Shifa was out of reach for the newly wounded, said Mohammad Qandil, a doctor at Nasser Hospital in Khan Younis in south Gaza, who is in touch with colleagues there.“Shifa hospital now isn’t working, no one is allowed in, nobody is allowed out,” he said.The Palestinian Red Crescent said Al-Quds hospital was also out of service, with staff struggling to care for those already there with little medicine, food and water.“Al Quds hospital has been cut off from the world in the last 6-7 days. No way in, no way out,” said Tommaso Della Longa, spokesperson for the International Federation of Red Cross and Red Crescent Societies.

Men check the bodies of people killed in bombardment that hit a school housing displaced Palestinians, as they lie on the ground in the yard of Al-Shifa hospital in Gaza City on November 10, 2023, amid ongoing battles between Israel and the Palestinian Hamas movement. (AFP)

Three UN agencies expressed horror at the situation in the hospitals, saying it had in 36 days registered at least 137 attacks on health care facilities, resulting in 521 deaths and 686 injuries — including 16 dead and 38 wounded medics.“The world cannot stand silent while hospitals, which should be safe havens, are transformed into scenes of death, devastation, and despair,” it said, saying half of Gaza’s hospitals were now closed.With the humanitarian situation across Gaza worsening, 80 foreigners and several injured Palestinians crossed into Egypt in the first evacuations since Friday, four Egyptian security sources said.Poland said 18 of them were its citizens, and US National Security Adviser Jake Sullivan told CBS News American citizens would be moved out of Gaza during Sunday.

AID DELIVERIES BY TRUCK AND PARACHUTEAt least 80 aid trucks had also moved from Egypt into Gaza by Sunday afternoon, two of the sources said. Jordan said earlier it had air-dropped a second batch into a field hospital.Very little aid has entered Gaza since Israel declared war on Hamas more than a month ago after militants rampaged through southern Israel, killing about 1,200 people and taking more than 200 hostages, according to Israeli officials.

White phosphorus fired by Israeli army to create a smoke screen, is seen on the Israel-Lebanon border in northern Israel, November 12, 2023. (REUTERS)

Palestinian officials said on Friday that 11,078 Gaza residents had been killed in air and artillery strikes since then, around 40 percent of them children.Disease is spreading among evacuees packed into schools and other shelters and surviving on tiny amounts of food and water, international aid agencies say.Speaking from inside Gaza City, Jamila, 54, said she and her family could hear the roar of tanks nearby.“During the day, people try to look for essential items such as bread and water, and at night people try to stay alive,” she said. “We hear explosions throughout the night, sometimes we can tell that some of these explosions are exchanges of fire between the resistance fighters and the Israeli forces.”Palestinian health officials said 13 people had been killed in an Israeli air strike on a house in Khan Younis in southern Gaza on Sunday.Residents reported increased fighting around Al-Shati refugee camp, by the coast in northern Gaza. The Israeli military said it had killed a number of militants there and called on civilians to use a four-hour pause to evacuate south.The Gaza fighting has reignited conflict on Israel’s northern border with Lebanon, which has seen the worst cross-border clashes since 2006.Lebanon’s Hezbollah group, which like Hamas is backed by Iran, said it attacked Israeli army troops near the Dovev Barracks on Sunday, inflicting casualties.The Israeli military said earlier that anti-tank missiles fired by militants had hit a number of civilians, adding that it was retaliating with artillery fire.The UN peacekeeping force in Lebanon said one of its members near the town of Al-Qawzah in southern Lebanon had been wounded by a bullet overnight.

Article Source： ARAB

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Devin

Economic

U.S. Highlights

The risk of a government shutdown has returned as Congress has one week left before the continuing resolution passed on September 30th expires.
The Federal Reserve’s Senior Loan Officer Opinion Survey showed that banks continued to tighten credit standards in the third quarter, as credit demand weakened further.
Consumer credit growth eased in the third quarter as an acceleration in revolving credit growth (i.e. credit cards) was offset by a contraction in nonrevolving credit (i.e. student loans).

Canadian Highlights

Merchandise trade data out this week showed a further widening in Canada’s trade surplus in September, suggesting net trade will make a positive contribution to Q3 growth.
The minutes from the Bank of Canada’s policy discussions showed that “lack of downward momentum” on the inflation front remained the top concern for policymakers and was behind the difference in opinion on whether more hikes are needed.
The Senior Deputy Governor Carolyn Rogers delivered an update on the Financial Systems Review where she warned households and businesses to prepare for a “new normal”, where the cost of borrowing is likely to remain elevated over the medium-term.

U.S. – Government Shutdown Risk Redux

After last week’s busy slate markets took a breather to digest last week’s Federal Reserve policy decision and prepare for the risk of another potential government shutdown next Friday. On the data front, the Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) and consumer credit report both showed credit conditions remained tight and demand continues to wane.

Monday’s release of the SLOOS showed that banks continued to tighten credit standards across loan categories in the third quarter and report weaker business and consumer demand for loans (see here). Although this came as little surprise considering Treasury yields rose by roughly 100 basis-points in Q3, the share of banks reporting tighter standards for commercial and industrial loans actually declined relative to the second quarter (Chart 1). This also held true for consumer credit cards and auto loans, although personal and mortgage loans each saw broader tightening relative to the second quarter. Despite the modest narrowing of credit tightening in the third quarter, the Federal Reserve’s continued signaling of rates staying higher for longer means a material loosening of credit standards likely remains a way off.

Easing consumer demand for loans was also evident in the Federal Reserve’s consumer credit data release on Tuesday which showed outstanding credit growth slowed notably relative to the second quarter. Outstanding revolving credit loans, which includes credit cards, saw accelerating growth in the third quarter of 8.6% while non-revolving credit growth, which includes student loans, declined by 2.4% (Chart 2). Under the weight of higher prices many consumers are increasingly relying on revolving credit to support spending, particularly as the moratorium on student loan repayment ends. Next week’s retail sales data will show whether the past six months of real sales growth, aided by consumer credit, continued into October despite the growing headwinds facing consumers.

In addition, updated CPI data out next week is expected to show continued easing in aggregate price pressures, supported by cooling energy prices. While this would undoubtedly be positive news, core inflation, which excludes food and energy prices, is expected to persist well above the Federal Reserve’s 2% target. A majority of FOMC members have noted that their current pause is conditional on sustained disinflation progress, with Chair Powell stating on Thursday that “if it becomes appropriate to tighten policy further, we will not hesitate to do so”.

Rounding out the coming week is the return of the risk of a potential government shutdown (see here) as the continuing resolution passed on September 30th expires on Friday, November 17th. Of the twelve appropriation bills that need to be passed to fund the federal government, the House has passed seven and the Senate has passed three with no consolidated bill managing to pass both chambers of Congress. This means that another continuing resolution may be used as a stopgap once again, but markets are likely to become increasingly apprehensive as Friday’s deadline approaches.

Canada – ‘Higher for Longer’ is the BoC’s Winning Strategy

This week was sparse on economic data but rich on remarks from the Central Bank. Neither had a significant impact on the markets, with the TSX largely building on the dynamics across global equity markets, and finishing the week slightly lower. Volatility in the bond market returned by Thursday, reflecting the anxiety south of the border where weak demand in the 30-year auction helped to push the term premium higher. The only sigh of relief came from oil prices, although the decline in crude was driven largely by expectations for slowing global demand rather than peace in the Middle East.

On the macro front, Statistics Canada reported September’s data on merchandise trade, which recorded a second consecutive month of trade surplus, with exports gaining slightly more than imports. This offset the negative impact from the B.C. port strike and Nova Scotia floods, observed earlier in the quarter. Exports also outperformed imports in volume terms, which means trade will be a net contributor to Q3 growth.

Looking ahead, the minutes from the Bank of Canada’s policy discussions indicated an anticipated slowdown in exports, attributed to a decrease in global demand. But it was concerns of the disinflationary process stalling that remained the top concern for the Governing Council. Higher global oil prices, rising cost of rent and other housing-related costs, driven by demand-supply imbalances, have been the primary factors leading to the recent stalling in disinflationary dynamics. Moreover, despite the ongoing easing in the labour market, wage growth remains in a range that’s higher than is needed to help push inflation down towards the BoC’s target. This ‘lack of downward momentum’ was behind the difference in opinion on whether more hikes are needed.

Despite these concerns, members observed that the 475 basis points in rate hikes have helped to rebalance the economy. Consumer spending and household credit growth are both showing signs of slowing, as households continue to adjust to higher borrowing costs (Chart 2). This message was echoed by the Senior Deputy Governor Carolyn Rogers who delivered an update on the Financial Systems Review. She reiterated that servicing debt is getting harder for some households, which can be observed through higher consumer delinquency rates and a rising share of accounts with utilization rates above 90%.

Rogers also pushed back on the expectations for lower rates and advised households and businesses to prepare for a ‘new normal’, where the cost of borrowing is likely to remain elevated. ‘Higher for longer’ rhetoric remains the winning strategy for the Bank as it keeps financial conditions tight without adjusting the policy rate. With little hard data to mull over, markets are likely to remain in ‘wait and see’ mode until the CPI report on November 21st. Next week, we’ll get the most recent reading on existing home sales, which will provide an update on whether recent weakness gained more traction in October alongside the sharp uptick in yields. Stay tuned!

Article Source： ACTIONFOREX

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Cohen

Central Bank

Economic

Former Federal Reserve Chair Alan Greenspan said inflation is under control when consumers don't have to think about it before making a purchase.

Twenty months into the current Fed's rate-hiking cycle, people are still thinking about it. Prices remain uncomfortably high, with the Consumer Price Index (CPI) up 3.7% in September from a year ago.

Many investors are worried the final stretch to the Fed's 2% inflation target will be challenging. However, there are signs that prices may ease substantially and, according to Capital Group economist Jared Franz, “the much anticipated 2% inflation baby could be delivered early.”

This comes as the U.S. economy and labor markets continue to hum, defying forecasts of a recession.

Fed's 2% Inflation Target Could Be Delivered Early_1

Sky-high rent is falling

“The inflation story today is very different from 2022, and there is one big reason why: Rent has decelerated,” says Franz. “Where rents go, inflation will eventually follow.” So it makes sense that economists start with rent expectations to forecast CPI. Specifically, rent increases need to slow to 4% for the Fed to have any chance of achieving their target.

The post-pandemic surge in rent has fallen dramatically closer to that 4% figure. A look at the rent component of CPI shows that price increases slowed to about 5.9% in September from a peak of 9.1% in June 2022. Rent data from real estate company Zillow, which measures asking rent on new leases, has rent rising at an even slower pace of 3.2%.

It can take several months for lower rents — as tracked by Zillow and other sites — to flow to CPI. Nevertheless, as Franz puts it, “There may be some blips, but rent is speeding in the right direction.”

Fed's 2% Inflation Target Could Be Delivered Early_2

Meanwhile, productivity, which measures worker efficiency, has rebounded. Over the last four quarters, data from the U.S. Bureau of Labor and Statistics indicates that productivity has rebounded to 1.2%, while a related measure known as unit labor costs slowed to 2.5%. “These are patterns you see when economies start to heal,” Franz notes. Improved productivity and slowing unit labor costs place downward pressure on inflation.

Combined with stable commodity prices due to meager growth in China, Franz believes inflation could hit 2% by the end of 2024. That's earlier than the Fed's median forecast of headline inflation at 2.5% and core inflation at 2.6%. The Fed's preferred inflation measure is the core Personal Consumption Expenditures Index, which excludes food and gas, and generally tracks closely with core CPI.

What if inflation gets stuck above 2%?

“If inflation was to hold steady at 3% it indicates to me that prices for an array of goods have resurged,” Franz says. That scenario is less likely to happen.

One reason is because pandemic-era distortions such as the rapid growth in money supply, or M2, have reversed course. This broad measure of money in circulation has declined 3.7% from a peak of $21.7 trillion in July 2022 to $20.9 trillion in August 2023. M2 includes cash, coins, checking account deposits, savings accounts and money market funds. “There's a lot less money available to pay for goods and services, which just tells me that inflation will continue to fall,” adds Franz.

Recall that the Fed's 2% goal is not a hard target and is instead an average over time, something officials announced without much fanfare in August 2020. Inflation nearing target could help propel U.S. stocks and bonds. Historically, the average annual returns for stocks and bonds were positive when inflation was in the range of 0% to 6%, with the best returns for stocks when inflation was between 2% to 3%. Past results, of course, do not predict future returns.

Fed's 2% Inflation Target Could Be Delivered Early_3

The Israel-Hamas conflict bares monitoring as a sustained increase in energy prices may result in an upside risk to the inflation outlook. Franz believes a reacceleration of inflation could pressure the Fed to keep rates high for an extended time frame.

The Fed has worked hard to gain credibility, so it is unlikely to change the inflation target as it continues its efforts to promote financial stability.

Can we reach 2% inflation without a hard landing?

Blame it on the U.S. consumer. With unemployment near a 50-year low at 3.8%, the recession that's just around the corner remains elusive as consumers continue to outrun gloomy growth expectations. High rates have chilled some parts of the economy, but that process has so far happened at separate times in varying industries. To be sure, the recent rise in long-term interest rates has raised hard questions about the government's total debt burden and just how much longer consumers can keep the economy going.

Massive pandemic-era stimulus provided temporary relief for many households and directed new federal spending toward clean energy via a mix of tax incentives, grants and loan guarantees. But with student loan payments resuming in October after a yearslong pause, will consumer spending flatline?

Consumers have largely exhausted excess savings from the COVID-19 years, but the recent increases in wage growth are expected to go directly into spending. The impact from the resumption of student loan payments will likely be minimal, with borrowers expected to cut their spending by about $56 on average per month, according to the Federal Reserve Bank of New York.

Meanwhile “government spending for certain industries such as industrials will continue to bleed into the recovery over the next five years,” Franz notes. Some aspects of pandemic-era stimulus may last well beyond that window.

In short, the U.S. government will likely continue to support the economy by creating demand for goods and services. That could help keep labor markets in check and a recession at bay. Job growth has been robust, with 336,000 jobs added in September.

“As long as we're pumping out monthly jobs growth above 120,000, the economy will continue to tread water,” concludes Franz. “I haven't been as bearish about the economy because labor markets have been so good, and I think the U.S. can print 2% GDP growth over the next year.”

Source: Capital Group

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Alex

Economic

Commodity

Gold Market Recap & Outlook

October brought a significant turning point for gold as heightened geopolitical turmoil along with a shifting outlook towards US monetary policy sent the spot price 7.32% higher in US$/oz — the largest monthly gain since March 2023. Gold ended the month up 8.76% year to date, while also breaching the psychological threshold of US$2000/oz on October 27 for the first time since May. October also marked the third consecutive month of losses in global and US equities — the first time since 2020 — with the S&P 500® Index and the MSCI ACWI Index dropping 2.1% and 3.0% respectively in October, despite the US posting 4.9% gross domestic product (GDP) growth in Q3 2023.

Gold's rally was fueled by increased geopolitical volatility following the October 7 Hamas attack on Israel, with Israel responding by declaring war against Hamas in the Gaza strip. Market concerns of a potential escalation of this conflict and regional spillover across the Middle East spurred risk-off sentiment and demand for defensive assets such as gold. As uncertainty in the geopolitical realm remains elevated in the Middle East and Ukraine, gold may continue to see support driven by investor portfolio diversification and safe-haven buying.

Consensus that the Federal Reserve (Fed) was nearing the end of its rate hiking cycle solidified in October. Following a rate pause from the September 20 FOMC meeting, the Fed's decision to keep rates unchanged on November 1 for the second consecutive meeting confirmed market expectations that had buoyed gold throughout October. Looking ahead, markets continue to price in Fed rate cuts by mid-2024, which should provide support for gold heading into year end.

Gold's Chart of the Month

Gold Performance Drivers

Flows

Global gold-backed ETFs registered outflows in October for the fifth consecutive month, albeit at a slower rate compared to the prior month. Global gold ETF holdings dropped 0.7% for the month, an estimated US$1.2B of net outflows versus US$3.4B outflows in September, according to Bloomberg data. COMEX Managed Money net speculative gold positions more than doubled to 55,748 contracts as of October 24, compared to 23,438 contracts in the month prior.

Factors

The US dollar saw a slight increase of 0.46% in October, pushing the greenback's year-to-date return to 3.03%, as both gold and the dollar saw increased flight-to-safety demand. US 10-Year Treasury yields closed October at 4.89%, rising 0.32% from 4.57% last month. Commensurately, the US 10-Year TIPS implied yield rose from 2.23% to 2.45% in October, as market risk and central bank buying continues to support gold against the traditional headwind of higher real yields.

Fundamentals

Global gold demand in Q3 increased 15% from Q2 to 1,148 metric tons, while seeing a 6% drop on a year over year basis. Demand was led by significant central bank purchases, amounting to 337 metric tons in Q3. This was 2.5 times larger than the average quarterly central bank purchases since 2010, and brought year-to-date net central bank gold purchases to 800 metric tons.

Gold Price Trends

Gold ETF Flows

Gold Futures

Source: State Street Global Advisors

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Owen Li

Economic

Energy

Europe's energy security remains a key concern despite the progress the region has made in weaning itself off Russia's gas imports.

Throughout 2022 and 2023, European nations have significantly increased their reliance on alternative energy sources, reducing their dependence on Russian natural gas and swiftly replenishing their gas storage levels.

At the same time, relatively mild weather last winter meant demand for fossil fuels remained low, helping with the energy transition efforts in many countries.

However, pressing questions remain on whether all these preparations will be sufficient to face the coming months. Will Europe be able to tackle the potential challenges that the energy market could pose in 2024 and beyond?

Who supplies Europe's energy today?

After fears that Europe could run out of gas in 2022 after Russia cut gas exports following the start of the Ukraine conflict, its energy position has been looking much more stable.

Norway has replaced Russia as the largest gas supplier, while a combination of mild winter temperatures, lower energy prices and the boost of liquified natural gas (LNG) imports from international suppliers ensured Europe survived the past winter and could plan ahead.

Winter Is Coming - Are Europe's Energy Security Concerns Returning Too?_1

All these factors meant that gas storage facilities across the European continent were at 90% capacity in August, almost three months ahead of the 1 November deadline.

Europe has also made bigger steps in its energy transition. As part of the gas demand reduction regulation established by the REPowerEU plan, consumption of gas dropped by over 19% (15% was the minimum requirement) between August 2022 and January 2023, compared with the same period five years before.

Winter Is Coming - Are Europe's Energy Security Concerns Returning Too?_2

Karin Kaiser, Head of Private Markets Europe, Schroders Greencoat, said: “Gas storage levels are high going into the winter this year at 96% capacity, and that is a relief compared to nine months ago, when everyone was a little concerned about supply.

“Last year was a relatively mild winter and we saw successful consumption reduction measures because everyone was pulling in the same direction. It is questionable whether these efforts can be repeated. Does the public want to reduce industrial activity or reduce water temperatures once again?

While Europe is transitioning its energy system, these uncertainties will likely persist.

“Energy prices will likely stay persistently higher than they were 18 months ago. A significant part of the gas supply has been replaced via LNG with long term and relatively expensive contracts. We have seen how these persistently high energy prices have impacted some countries, in particular Germany given its economy is so energy-intensive.”

Industrial production in Germany has seen a sharp and continued downturn throughout the year following soaring energy prices in 2022, higher interest rates and falling exports. If industrial and economic stagnation persist and this year's winter turns mild again, gas prices could remain subdued.

Winter Is Coming - Are Europe's Energy Security Concerns Returning Too?_3

Renewables growth: is Europe's energy transition on track?

Since the Green Deal policy announcement in 2019, which aims to achieve climate neutrality by 2050, Europe has fallen behind in the global race for clean technology. Some renewables projects and policy targets have perhaps been over-ambitious.

Mark Lacey, Head of Global Resource Equities, said: “The most forward-thinking and energy-secure country in the world right now is the US. They're going to be leaders in batteries, in solar and they're also going to be a leader in gas as a transition fuel. Of course, they're going to export lots of gas to Europe.

“However, it is in Europe where we see the most potential for change. With the EU Recovery Fund, Europe was the leader in energy transition, but it's fallen behind. There's a problem in the UK in terms of energy policy - you have poor grid connections, poor wind farm auctions, and uncertainty causing projects to stall.

“But I believe this will change in Europe over the course of the next six to 12 months, and you'll get positive policy momentum, which is why we prefer more European exposure than US exposure at this point in time.”

In 2022, renewable energy in Europe generated more electricity than fossil gas for the first time. Wind and solar power generated 22.3% of the EU electricity in 2022, overtaking fossil gas (20%), according to energy think tank Ember.

Karin Kaiser, said: “The buildout in renewable energy generation in Europe has been relatively successful this year. However, it is likely that the speed of the buildout could slow down as we reach higher and higher renewable penetration levels. Renewable auction results for new projects have not delivered as expected across Europe in 2023, as a result of inflationary and supply chain pressures, and because of changing return requirements on the investment side.

“Energy transmission and energy storage are the two pillars that will increasingly shift into focus over the next few years. We have seen some advances, such as the beginning of construction of a North-South grid connection in Germany, although it will be another five or six years until that is built. Across Europe, we see a need to accelerate investment and planning to get the European grid to a place where it can deliver greater flexibility.

“The roll-out of energy storage such as batteries has accelerated, driven by new regulatory frameworks but also varying between countries. We are yet to see utility scale investment across all of Europe. The same is true for hydrogen, as most of the European electrolyser pipeline is shifting towards the end of the decade. While there is a lot of interest in the sector, there are probably fewer projects coming through than we would like. Cheap renewable energy and better regulatory support are the key factors to accelerate investment in these sectors.”

What's the outlook for renewable investing in Europe?

Karin Kaiser, said: “There has been a strong re-rating in the renewables market. We are now close to double digit returns for operational renewables while similar assets used to offer 5 to 6% unlevered returns two years ago. At the same time, we do not see a lot of liquidity in the market now, which makes the sector a good buying opportunity.

“There is no longer as much capital available. Still, we see renewable assets gain in strategic importance as other sectors need more green electricity to decarbonise and comply with policy targets towards net zero. In addition, we see continued volatility of global energy supply as geopolitical insecurity increases globally, which further contributes to the case of renewables.

“The energy transition remains the biggest infrastructure and capital requirement that Europe has seen for many decades.”

Winter Is Coming - Are Europe's Energy Security Concerns Returning Too?_4

What's next for Europe's energy security?

There are still risks underpinning Europe's energy supply.

The new dependence on LNG will mean European energy prices will be more sensitive to supply disruptions globally. This includes competition with China reopening its market after Covid and demanding more energy, as well as the continued dependency from Russia for LNG, currently the second largest LNG exporter after the US.

Mark Lacey said: “We expect the energy market in Europe to continue to be fragile. Even if gas prices have retraced from their highs because of weaker demand, they will continue to be volatile as both the Ukraine war and the conflict in Israel threaten global supply. Potential further disruptions of LNG supply from striking actions by Australian workers at offshore gas platforms also add to these concerns in the short term.

“Europe is competing directly with Asia for those LNG cargoes from Qatar and from the US. Asia is putting in disproportionate amount of fixed import capacity on LNG, versus Europe's entire floating capacity.

“Europe has become absolutely desperate for these imports over the next three to four years and this is one of the challenges for the energy transition. We're seeing a continuous step-up in long-term contracting of energy prices. This will mean better returns starting to flow into the renewable generation sector, which is speeding up the demand.”

Winter Is Coming - Are Europe's Energy Security Concerns Returning Too?_5

Which sectors are well positioned for this transition?

Mark Lacey, said: “We are changing the way we use energy in the world, and there's no single technology that's going to accomplish it at all - we're going to need wind, solar, battery storage. We also need grid infrastructure to cope with increased intermittent electricity load from renewables. We will see an acceleration in growth in well-established industries such as wind, solar, and the grid as well as newer technologies such as battery storage, carbon capture, hydrogen and nuclear power.

“With over $100 trillion still to be spent across the different value chains by 2050, the investment opportunity is huge, and a lot of sectors stand to benefit as we go through the transformation that lies ahead. It is up to us as investors to identify those segments – and the companies within them – that can best capture this capital and convert it to equity growth.”

Source: Schroders

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Political

Tensions in Northern Myanmar

The plane crashed on Saturday over Kayah state in eastern Myanmar, near the Thai border, amid fighting between the military and the Karen National Defense Force (KNDF), with both sides reporting that the plane was shot down.

Junta spokesman Zaw Min Tun had told state-run MRTV that the plane crashed due to a technical problem and that the pilot had ejected safely and was in contact with the military.

The incident comes as Myanmar's military battles opposition forces on multiple fronts and an insurgency by ethnic minority and anti-junta militias that security analysts say is unprecedentedly coordinated.

Myanmar's military-appointed president said last week that the country risks secession by failing to deal more effectively with the insurgency.

Conflict in the northeastern Shan state bordering China has displaced at least 50,000 people, cut off trade routes and captured towns since three ethnic minority rebel groups launched an anti-junta offensive last month.

According to a Reuters report today, China has called on all parties to cease hostilities.

The rebel alliance said it had captured more than 100 military posts. Attacks on towns have also occurred in central Myanmar and the Sagaing region in western Shan State. Hundreds of foreign workers have been trapped in the fighting, including Vietnamese and Thai citizens, many of whom human rights activists say are victims of human trafficking.

Thailand's Foreign Ministry said on Saturday that 200 Thai nationals were waiting to be evacuated "as soon as circumstances permit."

The KNDF said on its official Facebook page that the rebels shot down the plane with heavy machine gun fire on Saturday and that its members were searching for the pilot.

Reuters said it could not verify the information.

News outlet Mizzima posted images on its Facebook page of what it said was a helmet and parachute abandoned by one of the pilots.