Geopolitics and Markets Review - 23rd December 2022

Look forward to 2023 for Europe and the Rest of the World.

Looking Forward To 2023 - Europe

Europe had energy storages filled a lot quicker than people suspected in preparation for this winter. And it still might not be enough. Will Europe cope again next winter to get storages filled? More storages need to be created or reopened. And a greater level of energy security needs to be established, on a global level. Nobody can completely rely on another nation for something as essential as energy. Germany has resorted to coal after its decoupling from Russian energy. And they can’t go back after the Nord Stream sabotage. Coal consumption is at an all-time high this year. Europe is still in an energy crisis, and it could take years to be in a more secure position. Winter 2023 will bring back the energy story in Europe.

Photo by Hunter So on Unsplash

Before then, the focus will be on a recession. A deeper recession is expected than in the US. The energy crisis at its core. Levels of debt in the ECB and managing different bond markets in different countries is not an enviable task at all. There is a reason the ECB is behind everybody else in hiking interest rates to tackle inflation. If they hike too much, one country’s bond market breaks that have high amounts of debt (cough, Italy) and they have to cut rates. But alas, the ECB has created the saviour for bond markets. It’s called the Transmission Protection Instrument. Snazzy right? Oh no wait, it’s quantitative easing in a different coloured hat. Germany is usually looked upon to bail out countries with debt struggles in the EU. Keep an eye on the spread between the German and Italian 10-year bond. Italy’s debt-to-GDP is 135%. Germany’s is around 60%. This puts Germany in a much more secure position as interest rates increase payments on debts in comparison to Italy. And so is the financial saviour of the EU.

If US interest rates remain higher for longer, dollar-denominated debt puts pressure on all other countries. The impact will be lagging, but the fastest rate hike ever will have impacts after the biggest debt-funded bubble in COVID has to burst.

Looking Forward To 2023 - Other Key Areas:

· Asia – China influence. The US arming its allies surrounding China such as Japan and Australia. India and China border tensions.

· The Mediterranean – There is a large amount of natural gas under the Mediterranean. Turkey, Greece, and Egypt all have coastlines accessing the Mediterranean. With border conflicts over the islands in the Med existing, can the two NATO states of Greece and Turkey remain peaceful?