This is due to the euro and the pound, which suggests that it is the European currencies that are weak, rather than the dollar that is strong.
Story #7 — Slumping business activity
On the economic growth front, the data published over the third quarter, continued to point to a global growth slowdown. The J.P. Morgan Global Composite Purchasing Managers’ Index (PMI) business survey entered contractionary territory in August for the first time since June 2020. Moreover, the local surveys showed that Europe, the UK and the US are all already teetering on the verge of recession.
The global outlook has indeed deteriorated markedly throughout 2022 amid high inflation, aggressive monetary tightening, and uncertainties from both the war in Ukraine and the lingering pandemic. Full-year US growth forecasts have been downgraded to only about 1.5 per cent in 2022. Financial markets are pricing in higher probabilities that a US recession is on the horizon (see chart below). Growth in China is projected to slow to about 4 per cent in 2022 due to new waves of COVID-19 infections and rising geopolitical risks. European economies have so far proved resilient to the fallout from the war in Ukraine, but strong headwinds and downside risks persist. The region is facing combined pressures from the energy crisis, high inflation, and monetary policy tightening. A recession this winter looks increasingly likely.
Story #8 — EU energy crisis intensifies
Europe continues to sink into an unprecedented energy crisis. In August, the one-year contract price for electricity in France exceeded €1,000 per megawatt hour for the first time. The German equivalent also reached a record high of €829 per megawatt hour. Of course, these prices are very volatile and did fall sharply in early September (see graph below). Moreover, many countries (France, Greece, etc.) are ready to put support measures in place, particularly for the most financially strained households. Finally, we note that EU natural gas stocks reported in August were in line with the historical average, thanks to increased imports of liquefied natural gas (LNG) and the reactivation of coal-fired power plants.
However, a substantial reduction in gas flows through the Nord Stream 1 pipeline could keep European energy prices high and lead to a very complicated winter. In early September, Gazprom announced that it had “completely stopped” gas transport through Nord Stream until a previously undetected oil leak was rectified. This could take days… or months. This means that Europe will now be forced to rely even more on the much more expensive LNG sold by China. The risks of recession in the EU therefore remain high, as shown by the weakness of the euro, which has fallen below parity with the US dollar.
Story #9 — The UK crisis
The UK is in the midst of a financial crisis of rare intensity. During the last week of September, the pound hit an all-time low against the dollar, coming very close to parity, while sovereign bonds saw their yields reach their highest level since 2008. The scale of the crisis is such that members of the Bank of England worked through the night to save the UK’s pension fund system. Indeed, the collapse of gilt bonds has led to huge margin calls on UK pension funds, triggering forced sales of gilts, further fuelling the decline. The following morning, the Bank of England had to announce the temporary suspension of the Quantitative Tightening and the implementation of a sovereign bond purchase programme in order to curb the rise in yields. Following this announcement, UK 30-year bond yields, which had previously reached a 20-year high (>5%), fell by 0.75% to 4.3%, the largest daily fall in yields on record.
