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The Macro Viewpoint - Europe’s gas squeeze, Brazil election preview, USD drivers
25 Plays3 years ago
We assess the latest developments in the gas market as the supply crunch intensifies, look at what Brazil’s October election could mean for the economy and consider whether USD strength can continue.
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Transcript
Introduction to the Podcast Series
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
Overview of Weekly Topics
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You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
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Coming up this week, we assess the latest developments in the gas market as Europe's energy squeeze intensifies.
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We consider Brazil's economic prospects as the presidential election draws near.
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And we look at whether the dollar's strength can continue.
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This podcast was recorded on Thursday, the 15th of September, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
Impact of Nord Stream 1 Shutdown
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Hello, I'm Aline van Duyn.
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And I'm P.S.
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Butler.
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The energy markets have very much been in the headlines in recent months.
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Although oil prices eased in recent days, Russia has tightened a screw again on Europe's gas market, raising the prospects of rationing this winter.
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Let's get the details from Kim Fustier, Head of European Oil and Gas Equity Research.
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Kim, welcome to the podcast.
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Thank you.
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So Kim, it's not the first time we've had you on the podcast, and unfortunately, you've been right about the risk of higher gas prices.
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So firstly, bring us up to date with the latest developments.
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Sure.
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So Russia has now fully shut down the Nord Stream 1 pipeline, which until recently was running at about 20% of capacity.
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The problem is that in the short term, supply is completely maxed out.
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We're importing as much LNG as we can.
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So the only lever from here is to decrease demand.
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So as a result, prices have just got to be high enough for long enough to engineer the scale of reductions in demand that we need to make it through not just this winter, but the next one as well.
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So are we gonna face rationing?
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I think the risk of rationing has certainly risen, although we could still avoid it if we have a mild winter.
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High storage levels for gas in Europe are certainly helpful as well.
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But if it does come to the point where gas has got to be rationed, then governments will have to decide who gets the gas instead of letting the markets do that work for them.
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And that's going to entail some really difficult decisions because all segments of the economy will argue that their activities or their industries are essential.
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There's a lot of talk about policy intervention, but you think that could backfire?
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The first measure that could potentially backfire is price caps on wholesale gas.
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For example, if the EU imposes a price cap on Russian gas, then you could easily imagine the Kremlin turning off the tap on the Ukraine pipeline, which is still running.
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So that would have the opposite effect of what we're trying to achieve.
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And then there's measures taken by European governments to try and protect consumers from the worst of price hikes and energy poverty.
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And these interventions are well-meaning, but they are muting price signals, and therefore they're hindering efforts to save on gas by subsidizing consumption.
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I suppose the point you're trying to make is that if the individual doesn't suffer the high gas prices, they're not going to be inclined to reduce their consumption.
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That's exactly right.
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And we have seen examples of countries, for example, France and Spain, where prices are currently capped and demand has been decreasing either not very much or in fact increasing, as we've seen in Spain so far this year.
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Is it fair to say that Germany is probably suffering the most from this situation?
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That's exactly right.
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Yeah, Germany is the hardest hit by the closure of Nord Stream 1.
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Before the war, it depended on Russia for up to 55% of its gas imports.
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So the closure of the pipeline is a big hit for Germany.
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Germany is probably the place where gas rationing risks are indeed the highest.
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And finally, what's your outlook from here?
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I think prices will have to remain high through this winter.
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We anticipate gas prices staying about seven times higher than normal through 2023 and then falling to about four times higher than normal in 2024 and then only really normalising in 2026 when we see significant new energy capacity coming online in places like the US and Qatar.
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Kim, thanks very much.
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Thank you.
Brazil's Economic Landscape Amid Elections
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Now to Brazil, where the economy has been growing faster than many had predicted, creating a fascinating backdrop ahead of October's presidential elections.
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We're joined by Ana Madeira, chief economist for Brazil.
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So, Ana, with the election just a few weeks away, what are the polls indicating?
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It's going to be a close one, isn't it?
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Indeed, indeed.
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So the polls are basically quite polarized, which means that they show two leading candidates.
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So we've got the first one, which is the former president Lula, who's polling above 40%, depending on the poll, maybe a little bit more.
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And Bolsonaro in the second place, which is the incumbent president that is polling close to 35% for the vote intentions for the first round.
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In the second round voting tensions, we see former President Lula polling a little bit above 50%, between 50 and 55.
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And Bolsonaro, we see him polling around 40%.
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So right now, the average polls are showing a victory for former President Lula in the presidential elections for Brazil.
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What's at stake in terms of the biggest policy issue?
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Right now, the biggest focus is what the next president is going to do about fiscal policy.
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because what is really in focus is the continuation of consolidation of fiscal policy in Brazil.
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And there has been a lot of pressure to increase spending, especially after the pandemics.
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And in the previous years and when we got the previous, when Bolsonaro was elected, there was a big effort to consolidate fiscal accounts to introduce
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a fiscal anchor and to give more visibility for the fiscal dynamics ahead.
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And right now for next year, the question is, is the next president going to keep that fiscal anchor, that fiscal role or not?
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We think that regardless of who wins the election, there's going to be an effort to make the fiscal rule more flexible in order to allow for more spending.
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Now, the question is, how much more flexible are we talking about?
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Right.
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So this is pretty much the concern, the concern of the market to make sure that
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the fiscal anchor still remains in place and that if it is made more flexible, that it's not made it too much so that we still are able to see some stabilization of gross debt to GDP within the next couple of years.
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So Anna, what about the economic backdrop?
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It has improved in recent months, hasn't it?
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Indeed, indeed.
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And actually, that's a very good point to raise because we think that it's very important the type of economic backdrop that the next president is going to inherit because it's either going to put more or less pressure
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for further spending, especially on social spending.
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And actually, given that the economic backdrop has improved, we think that this is also an additional factor that is probably going to relieve some of the pressures that would have otherwise
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led to a bigger expansionary fiscal policy.
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So indeed, we have had growth much better than expected for this year.
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We now expect growth close to 3%.
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Just to give you an idea, the beginning of the year consensus expectations was for this year's growth to be close to 0.3%.
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So clearly a big, big improvement there.
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The same thing is happening for inflation dynamics.
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Also, the expectation is that we're going to have much better, much lower inflation this year than anticipated before.
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The labor market also very solid.
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The unemployment rate has been surprising to the downside already since last year, which means that the next president is going to pick up an economy with a lower starting point for the unemployment.
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And lastly, fiscal dynamics.
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They've also improved on the back of much stronger revenues and also on the back of a relatively well-contained spending.
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So certainly this is a positive point for next year and for the next president.
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Anna, thank you so much.
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Thank you.
Invitation to Global Emerging Markets Forum
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Before we move on, we'd like to invite you to join HSBC's Global Emerging Markets Forum, which is in full swing online and running until the 30th of September.
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Policymakers, thought leaders, corporates, and our team of experts here in global research will be sharing their views on the outlook for emerging markets.
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If you're interested in attending, please contact your local HSBC representative for more details.
Factors Behind the Dollar's Strength
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We end this week in the currency markets where our team have been looking at what it would take for dollar strength to reverse.
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Paul Mackle is our global head of FX research and he spoke to Graham Mackay in Hong Kong earlier.
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So, Paul, you've been writing about the dollar and the circle of trust this week.
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Just tell us, first of all, what the circle of trust is in this context.
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Well, thank you very much.
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It's our framework about how we think about the broader dollar.
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And, you know, for some time, we've been emphasizing a few factors which we think really drive the broad dollar's direction.
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The first comes down to global growth.
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The second relates to the level of yields for the dollar, whether nominal or real.
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And the third feature comes down to risk appetite.
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Is it in a strong state or risk-seeking, or are markets very risk-averse?
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Alright, and with those three factors in mind, how does that inform your overall view on the dollar?
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Well, it still tells us to favor the broad dollar as we have done so over the past year.
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The magnitude of dollar strength has been surprising at times, but we haven't disagreed with the direction of travel.
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Global growth is still cooling, and normally the dollar does better in that environment.
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Markets are still somewhat nervous with the tightening of financial conditions.
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And that risk-averse tone, I think, is playing to the dollar's advantage.
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And when it comes down to the yields, well, the Fed is still telling us that they're very much in a hawkish stance.
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And that also is giving some support to the dollar.
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All right, so reasonably positive on the dollar there, but less so elsewhere, specifically the UK and Europe.
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I know you and your colleagues have been looking into core balances in those economies, and that's got you, I suppose, a little less confident on the outlook for those currencies.
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Well, that's right.
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I mean, my colleague Dominic Bunning has been looking at this and the core balance idea and looking at the combination of the current account with net FDI.
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In other words, looking at some of the balance of payment components which can influence longer term flows for certain currencies.
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So for the euro and sterling, there has been a big deterioration in these core balances.
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And there may not be much improvement going forward.
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And that still feeds into our caution on those two currencies.
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So those core balances, not much core strength.
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If anything, it's core weaknesses.
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All right, Paul, thank you very much for your thoughts.
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Thank you very much.
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So that's it for today.
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Thank you to our guests, Kim Fustier, Anna Madeira and Paul McEl.
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And thanks to all of you for listening.
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We'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.