Seeking Relief from Europe’s Gas-Price Shock | Lord Abbett
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Economic Insights

Surging natural gas prices are spurring governments to take steps to mitigate the economic impact. What are the implications for markets?

Read time: 2 minutes

While the impact of rising energy prices is being felt around the globe, European nations are being hit particularly hard. Indeed, Bloomberg reported that on October 1, Dutch front-month natural gas futures hit €100 a megawatt-hour, the highest price ever and the equivalent of about $190 per barrel of oil. 

The recent spike in the price of natural gas is the result of several factors: the drawdown of inventories during the cold weather last winter, some disruptions in European gas production, softer renewable electricity output in Europe, strong liquefied natural gas demand from Asia, and limited supply from Russia.

As a result, individual European governments are turning to fiscal measures to offset the damage to household incomes. These measures have the added benefit of mitigating political discontent, which is especially urgent for governments like France that are facing elections soon. An additional source of offset is the possibility of a European Union-wide measure where revenues from the EU’s Emissions Trading Scheme are directed to households.

Recent government efforts include the following:

  • In addition to an already-announced subsidy of €100 per household, the French government announced on September 30, 2021, that electricity taxes would be lifted, and it would block any new increases in regulated gas prices.
  • Italy is earmarking some €3.5 billion in subsidies to households.
  • Spain is cutting energy taxes and imposing a temporary windfall tax on the gains of energy companies to reduce household electricity bills.
  • Greece announced a small subsidy that would apply to 70% of households in the country.

The result should be a small drag on household incomes that will be offset through government subsidies and continued strong growth. Despite the increase in inflation from gas prices, we believe long-term secular forces will keep inflation contained in the Eurozone.

Germany’s inflation-linked bond yield curve embodies the market’s expectation of real interest rates. In the past two months, the curve shows a rapid decline of the short end while the long end is relatively unchanged; this is indicating a short period of high inflation and low nominal bond yields.

 

Figure 1. Amid Gas-Price Crunch, Investors’ Long-Term Rate Expectations Are Little Changed
Yield to maturity on German inflation-linked bonds for indicated maturities 

Source: Bloomberg. Data as of October 1, 2021. Inflation-linked bonds are securities designed to help protect investors from inflation. They are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

In other words, the market is, for now, buying in to the ECB’s story of transitory inflation and continued, strong monetary policy accommodation. But as the denizens of Westeros might remind us, “winter is coming,” and developments in natural gas supply and pricing will bear close watching.

 

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

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Tenor refers to the length of time until a financial obligation such as a loan or bond is due.

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