by Ivan Martchev
August 30, 2022
The euro finally declined below parity to the U.S. dollar last week and is likely to keep going lower as the ECB cannot normalize interest rates in a situation where the economy is under so much stress. Also, there is a geopolitical discount in eurozone assets, given the present dynamic with Russian natural gas. My target for the euro is to $0.90 as the war intensifies, which I suspect will happen in the next 3-6 months.
But the exchange rate of the euro to the dollar is the least of Europe’s problems right now.
I just flew back to the U.S. from my old homeland on the Old Continent, and I can attest with a high degree of certainty that Russia is performing the “boiling frog” maneuver on the European Union.
They say that if you put a frog in a pot of lukewarm water on a stove and you turn up the heat quickly the frog will jump out, but if you turn up the heat very slowly, the frog will slowly cook to death.
Over the last six months, the Russians sat quietly as EU sanctions piled on, then Russia started turning down the flow of natural gas, slowly over the summer. In early August, the Europeans figured out that they had no way to fill up their natural gas storage facilities for the winter at the present rate of flow.
There is no LNG capacity at present that will fill the void of Russian natural gas. The offer on the table from the Russians is: “You sanction me, I turn off the gas; you remove the sanctions, I turn up the gas.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In one week, TTF natural gas for EU delivery went from 244 euros per megawatt-hour to 339, This is the equivalent of crude oil being priced close to $500 per barrel, if one converts the BTUs in natural gas into crude oil. Needless to say, many industries cannot operate at those levels of natural gas prices, and mandatory shutdowns are coming, virtually guaranteeing a eurozone-wide recession. I don’t see any progress towards de-escalation in the Ukrainian conflict that will avoid such an outcome. The Europeans are unlikely to back down from sanctions, and the Russians are likely to keep doing what they are doing.
The Treasury Yield Spike is Close to Being Over
As the ultimate safe haven asset, Treasuries should benefit from EU wide turmoil, which is coming soon. And if the Fed is overzealous in its monetary tightening, this is bullish for Treasury prices, not bearish.
Treasury yields had one heck of a move from the July lows of 2.55% to 3.12% last week. I doubt they are going higher from here, and I think they may take out the recent 2.55% downside mark in due course.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I think 3.50% was likely the high for this cycle and it may very well constitute a false breakout above the downtrend in long-term yields that started in 1981. We won’t know that for sure for a few more months, but a good tell would be if we don’t surpass the 3.50% level anytime soon.
I think there is significantly more downside than upside on Treasury yields from present levels.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
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The Fed Is Once Again Out of Step with Reality
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Did Jay Powell Just Turn “Jackson Hole” Into Wall Street’s “Black Hole”?
Global Mail by Ivan Martchev
Euro/Dollar Parity is the Least of Europe’s Problems
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Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
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