The sky is clearing up…

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During the month of September, the market was cautiously following the situation around the US debt ceiling, the energy crisis, growing geopolitical tensions, as well as the default fears of one of the largest real estate developers in China, Evergrande. Unexpectedly, the first week of October brought clarity to the vast majority of these topics.

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To be more precise, the Senate finally approved the agreement that allows raising the debt ceiling by 480,000 million dollars, thus avoiding the government shut down until December 3. Nevertheless, this does not mean that the concerns have disappeared – the leader of the Republicans in the Senate, Mitch McConnell, said on Friday that his party will not help the Democrats raise the debt ceiling in December. The Secretary of the Treasury of the United States, Janet Yellen, on the other hand, has warned that not raising the country’s debt ceiling would drag the economy into recession.

Talking about growing tensions between the US and China, last Friday it was announced that Xi Jinping and Joe Biden could meet before the end of the year. Likewise, China and the United States have raised the issue of lifting customs duties and tougher sanctions. Of course, there is no talk of the total cancellation of the measures taken by the Donald Trump administration, but even a small advance in relations between the two world powers can have a serious impact on world trade.

In the case of the energy crisis, the pressures have been relieved thanks to the promise of Russian President Vladimir Putin to increase gas supplies to Europe and stabilize the market against the risk of serious economic damage. On top of that, the Secretary of Energy of the United States, Jennifer Granholm, said that the government is considering taking advantage of the Strategic Petroleum Reserve of the country to cool an increase in gasoline prices. In this context, it shouldn’t be a surprise that OPEC and its partners have chosen to maintain their plans to gradually increase oil production. Specifically, the cartel has increased by 400,000 barrels per day.

In the case of coal, however, the situation is somewhat ambiguous. On the one hand, the Chinese authorities announced an increase in production in one of the most important extraction regions of the Asian country, northern Inner Mongolia. On the other hand, floods and landslides in northern China’s Shanxi Province (the main coal-producing area) could make such plans not come true. 60 of the 682 mines in the province have already been closed, accounting for 30% of the country’s coal production.

We also find it necessary to mention that most of India’s coal-fired power plants have less than four days of fuel reserves, the lowest number in years. Considering that India generates almost 70% of its electricity through coal, if the mineral crisis is not resolved soon, it could end up paralyzing everything, including the industry.

Globally, on the other hand, higher energy prices could exacerbate inflation and cause both the Federal Reserve and the European Central Bank to end their loose monetary policy before it resumes. If the worst forecasts come true, we do not rule out that next year we will see a slowdown in world GDP growth. The problem could arise if the cooling of the economy is combined with the increase in inflation, the effect known as stagflation.

 

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