Europe has been on the receiving end of several unfortunate cracks. For instance, as we mentioned in December, France had to take nuclear reactors offline when problems were discovered in some critical components of the coolant system. More recently, a US LNG plant had a pipe not just crack but burst, leading to a closure that looks set to continue into October or beyond. But the physical cracks are just the tip of the iceberg as economic and monetary strain continue to take a toll.
“Intense economic pressure””
Energy is a clear focal point and in the center of the storm. With companies continuing to shutter thanks to the high price of energy, the outlook for Russian gas flows has changed faster than the weather. Sunshine arrived with Nord Stream 1 once again sending gas to Europe, but storm clouds returned as it was announced that the turbine sent to Canada for maintenance was “stuck in transit”.
Looking past the near-term ups and downs, European leaders are taking no comfort in the prospect of future flow restrictions and announced a plan to have countries curtail usage by 15%. While the plan is currently in the voluntary, velvet glove stage, the iron fist lies beneath, with provisions that gas consumption reductions would become mandatory “in the scenario of a severe gas shortage” (Another case of “Volunteer or Else”). Portugal, Greece, and Spain all took issue with the plan. A Greek government spokesman remarked that the country “does not agree… with the Commission’s proposal”, and the Spanish Energy Minister said that “contrary to other countries, Spain hasn’t been living beyond its means in energy terms”.
Meanwhile, in an attempt to bridge some of the cracks in the European bond market, the ECB announced a new tool to “support the effective transmission of monetary policy”. Released at the same time that the ECB announced a surprisingly large 50 basis point hike, the new “Transmission Protection Instrument” “will ensure that the monetary policy stance is transmitted smoothly across all euro area countries”. The Instrument would allow the ECB to “make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by country-specific fundamentals”, and while the purchases would be “focused on public sector securities”, ”Purchase of private sector securities could be considered, if appropriate”. (They’re cleared for the Alphabet Soup approach!)
P.S. The cracks in the housing market appear to be both growing and spreading. The latest survey from the National Association of Home Builders on builder confidence saw “the largest single-month drop in the history of the HMI, except for … April 2020”. Moreover, existing home sales slid 14.2% YoY in June, and Redfin noted that “prices are starting to come down from their all-time highs” and predicted that reduced competition and declining home prices would “continue for at least the next several months”.
P.P.S. Cracks may also be appearing in portfolios both big and small if the damage seen by CalPERS and “Ivy League Endowments” is any indication.
