Markets paid a lot of attention last week to the first German trade deficit since 1991 (seasonally adjusted): the euro slumped. Higher energy import costs and a loss of competitiveness vis-à-vis China have triggered € selling against the $. The Euro is falling on a trade weighted basis too: this is not just about dollar strength.
For German industry, the era of cheap Russian natural gas is over. Germany’s export-led growth model is being put into question, and the euro is reacting to the weakness in German manufacturing. The head of the German Federation of Trade Unions has warned that “millions of jobs” are under threat “in the event of a continued halt of gas supply from Russia.”
Whilst supply chain snarls and higher energy costs continue to cripple European industry, China has managed to keep costs down, increasing its competitiveness. On a 12-month moving total basis, the Eurozone’s trade deficit with China hit a record €228bn in April.
To be clear, this isn’t a bullish signal for China. Bank runs appear to be growing in number. Mainland stocks and property developer shares fell earlier today on concerns that cities across the country would be forced back into lockdown, due to the emergence of the contagious BA.5 Omicron variant. This is all dollar positive.
The unprecedented surge in electricity and gas prices will dent European output this winter. The threat of Russia cutting off gas supplies leaves the euro exposed to the downside and could approach 0.95 against the dollar. The whole European natural gas curve has repriced at a much higher level since last week. Traders are betting that gas prices are going to stay higher for longer through 2023 and 2024.
Now, the crisis is spilling over into commercial real estate. The North American Green Street Commercial Property Price Index fell 3.7% m/m in June, but the European index tumbled by more, down 7% m/m and 10% over the past three months.
