From the energy crisis in Taiwan: the 4 big risks for global markets

13 November 20222 years ago babelfish

Worsening of the energy crisis, risks for the real estate sector in China, increasing populist tone in the peripheral European countries and geopolitical risks relating to Ukraine and Taiwan. That's why these are the 4 big risks for global markets. The speech by Giorgio Broggi, Moneyfarm Quantitative Analyst

In an already very volatile market environment, where fears of inflation and recession keep the level of nervousness high, we believe there are four main risks that could have a systemic effect on global markets:

The worsening of the energy crisis;
Risks to the real estate sector in China;
The rise of the populist tone in the peripheral European countries;
The geopolitical risk: Ukraine and Taiwan.

The protraction (or worsening) of the energy crisis

The energy crisis risks worsening further and could trigger a liquidity crisis for European energy companies, putting the economic system in the geographical area in crisis and certainly worsening the recessionary expectations for the global economy in general.

In fact, in recent months, the volatility of the prices of raw materials has highlighted the fragility of the balance sheets of energy companies, which must protect themselves from changes in prices in the future. To do this, companies use a significant amount of derivative instruments that require collateral, that is, an amount of cash (or similar) that ensures that they are able to pay the counterparty in the event that the derivative position goes at a loss.

For example, a company that sells energy protects itself from price changes by selling (through derivative products) energy contracts in the future. In the event that the price of energy collapses, the profit on the short position in the futures markets would compensate for the current loss from selling at lower prices. In the event of a price increase, however, the position with derivative instruments would lose out, requiring higher collateral and causing an outlay not immediately covered by higher sales (which would take longer).

To give an idea of the scale of the problem, Sweden has proposed a $ 23 billion credit line for its energy companies. For the moment, the situation seems manageable, both because the prices of raw materials have partially normalized, and because the regulators have declared themselves ready to intervene in support. However, if the geopolitical situation were to worsen or if the reopening of China were more marked than expected, putting pressure on the prices of energy resources, the prospects for the European economy would be very bleak.

Risks for the real estate sector in China

China remains in a very complicated situation. Despite the easing of some anti-Covid measures, the world's second largest economy looks more fragile than ever. The housing market continues to falter due to a disturbing new trend in Chinese consumers who continue to block payments for new construction. Traditionally, builders require about 30% of the payment in advance, which is then systematically used to finance new projects, rather than to quickly complete those already started. The protracted lockdowns further delayed the completion of properties already sold and partially paid for, sparking protests, boycotts and putting real estate liquidity under pressure.

Moreover, to make matters worse, Chinese banks have "half-closed" the credit taps for the sector, in order to comply with government regulations on the maximum leverage levels of credit institutions and for fears related to an industry that, after the Evergrande case, it seems decidedly on the bubble. In our opinion, although the situation should not be underestimated, the government reacted promptly, with a series of measures sufficient to provide stability. In particular, the Chinese Communist Party intervened both by encouraging the demand for mortgages (for example by lowering rates), and by establishing aid funds for the completion of real estate projects, with almost 800 billion yuan already allocated.

For the moment the markets are satisfied with the measures taken and the demand for mortgages has started to rise again, giving hope for a gradual improvement in the situation. However, the government's increasingly authoritarian drift and less attention to market logic could lead to less market-friendly measures and worsen growth expectations.

The rise of the populist tone in the peripheral countries of Europe

The third key risk, especially for Europe, is that the economic situation leads governments to raise their populist tones, just as happened in the UK. If this were to happen, in the peripheral countries of Europe (Italy and Spain above all) the spreads on German debt could return to the levels of the 2011 debt crisis, putting the very existence of the European Union at risk. The markets are attentive to the new Meloni government, which for the moment seems to have reassured them, as the spread far from the highs of recent years tells us. If this security were to fail, the common European front on issues such as the conflict in Ukraine and the energy crisis would fail, aggravating the fragility of the economy as a whole.

The geopolitical risk: Ukraine and Taiwan

The global geopolitical situation remains the main unknown. First, Putin could follow up on his threats and test nuclear tactical weapons, causing an unpredictable escalation and possible conflict with NATO. Furthermore, Xi Jinping, during the Congress, reiterated his desire to annex Taiwan by 2024, increasing fears of an open conflict on the island. Although the August escalation did not cause strong reactions in the markets, the United States could intervene in the event of an invasion, with clearly catastrophic effects for the global economy.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/dalla-crisi-energetica-a-taiwan-i-4-grandi-rischi-per-i-mercati-globali/ on Sun, 13 Nov 2022 06:05:51 +0000.