Geopolitics
A global economic downturn will be a headwind for natgas prices over the cyclical horizon. Thereafter, LNG capacity additions will help keep the market in balance into the end of the decade. That said, Europe’s increased dependence on global LNG flows raises its exposure to market dynamics in the rest of the world. This will keep volatility elevated versus pre-Ukraine war.
Investors in European sovereign bonds should find solace that continental voters are not turning away from support for EU integration. As such, populist parties are not really that “far” left or right. And as long as they want to maintain popular support, they will have to abide by the fiscal rules imposed by Brussels. No such supranational constraint exists in the U.S., the real risk for global bond operators.
At first glance, France has moved to the far left. However, this coalition is fragile, and Macron’s allies still hold the balance of power. What are the assets that will benefit from this new political setup, and those that will not?
The new Labour government will have flexibility to respond to macro shocks, which is positive for the UK in general, namely GBP-EUR, and also gilts in absolute terms. But over the long run, tax hikes will likely surprise to the upside, which poses a risk to corporate earnings.
Does the incipient slowdown in European data herald a soft landing and a goldilocks period for equities? We have our doubts.
