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What’s next for the industry in Europe?

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This article is an on-site version of Martin Sandbo’s Free Lunch Handout. Participation over here Get our newsletter sent straight to your inbox every Thursday

The impact of the energy crisis on European industry is still hotly debated. when highlighted in Free lunch last week How well industrialization has held up on the continent, reactions have varied from denial to surprised delight. as economics professor Daniela Gabor he said in a tweet Echoing how I feel, “I was so gloomy about carbon shock therapy—and so far, so wrong. That’s nice.”

This, of course, is not how many European leaders see this. Instead, high energy prices are seen as an existential threat to the industrial base, which, moreover, is being lured away—the argument goes—by unfair US green subsidies. (“We wanted you to take climate change seriously but not so much that your companies produce green technology in competition with us,” seems to be the view of some.) He was guided by a series of promises, from reassurances That Washington will adjust its policies so as to leave the European industry unharmed, to Commitment to larger subsidies at home.

As the controversy continues, it couldn’t hurt to dive back into the data and what it should mean for policy.

Start with Europe’s remarkable resilience to rising natural gas prices. My colleague Shotaro Tani added to the evidence of this, reporting on Monday that European users Reduce consumption by a quarter in October and November, compared to five-year averages. This is largely due to lower industrial demand for gas.

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Gas demand in Europe has fallen rapidly

Some of the reactions to my celebration of this success have come from the angle of climate change. They argue that the gas cuts were only achieved at the cost of consuming more oil, or replacing coal with gas in power generation. So I went to look at the data, and I can reassure the skeptics. The diagram is shown below European Union imports of oilwhich looks pretty flat this year and is, if anything, below pre-pandemic levels.

Monthly EU imports of crude oil

And while there have been reports of increased coal use, the numbers are clearly not enough to move the needle across the economy as a whole. Here is a scheme coal consumption in electricity generation in the European Union. Again, it is still below pre-pandemic levels.

Monthly use of coal in electricity generation in the European Union

Others resist the explanation that European industry has weathered the crisis well, as I argued last week. There are certainly reports of some production being halted. [German chemicals group BASF is a case in point.] But this must be seen against a general background growth in production in factories in nearly every European country, as I documented last week.

For more details, take the latest industry figures from Germany. Industry excluding energy and construction – which relies heavily on manufacturing – produced 0.8 percent more in October than a year earlier. Within this, the “energy-intensive branches” recorded a decline of 12.6 percent over the year (these are five sectors that account for a fifth of the value added in the industry but three-quarters of its energy use). So manufacturing that uses a lot of energy has shrunk sharply, other manufacturing has grown, combined growth has been positive — it all sounds like exactly how we want an adaptive capitalist market economy to behave.

Finally, some object to comparing factory production today to last year, given how the pandemic has turned our economies upside down. fair enough. But taking a long view certainly means focusing on the fact that I highlighted last week, which is that EU manufacturing output is greater than ever. If this is a crisis, it is not a bad crisis.

Admittedly, it was an unexpected situation. So it’s only natural to be overwhelmed by a better-than-you-think-the-stats-telling story (I certainly was, as I expected things to be worse). But it is not healthy for public discussion to be confused with thoughts of what (as I am Mark Twain’s face In another context) we know for sure that it is not.

Take diffuse anxiety (prominently described by my colleagues in Energy Source Newsletterwhose chart is reproduced below) that the US is stealing Europe’s bacon, or at least its investments in batteries and other technologies of the future.

Bar chart of estimated capital investment ($billion) showing EU investment in US electric vehicles and battery manufacturing by year

But there seem to be similar concerns about Chinese companies Build a lot of battery factories in Europe. Can you really complain about both things at the same time? Maybe this is just a story about business leaders building batteries wherever there’s a demand for them – which now includes the US, and obviously hasn’t stopped including Europe. The most and the merrier.

Of course, one might think that for reasons of “strategic autonomy” European demand for batteries would be better met by European-owned or European-controlled battery production located in Europe. But if that’s the case, it’s a little rich to complain about the US trying to do just that with the clumsy discriminatory tax breaks that European leaders stir up.

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What is the most obvious way to think about the future of the green industry in Europe? I had a stab in my stomach Monday column, where she argued that the EU should draw the conclusion that it is a fossil-energy-poor continent: that it not try to maintain a fossil-energy-intensive industry. Instead, focus on accelerating the green transition, massive expansion of renewable energy generation and transmission, and developing an industry that can thrive in the renewable energy system. This could mean pursuing production methods that are adaptable to the vagaries of renewable energy – from adapting production stages to different energy needs with energy price fluctuations to integrating thermal storage and energy storage into plant facilities.

It was a pleasure to read a perforated editorial In our pages by Fatih Birol, head of the International Energy Agency, he argues along similar lines: Europe must face structurally higher fossil fuel prices, but it has a chance to build an industry geared towards a decarbonized economy. But this requires a “master plan for the future that goes beyond survival mode”.

Finally, read the careful analysis by George Riklis and Philip Losberg of the Center for European Policy. claim to The new EU funding mechanism is worth a trillion euros On the basis of co-borrowing. One can argue about the details. But this is the level of ambition required.

Other readings

  • Ukraine’s President Volodymyr Zelensky is the Financial Times’ Person of the Year. Our editor went to Interview with him.

  • This week, the European Union began banning the import of Russian oil, and the Union and the Group of Seven countries imposed a ceiling on the prices of Russian oil sold anywhere in the world with the help of their companies. Declaration of the European Union over here and a US Treasury fact sheet over here.

  • The cost of living is a crisis Drive more women into sex work.

  • The EU-Western Balkans summit took place in Tirana this week. in New reportThe Vienna Institute for International Economic Studies shows that it is time for the European Union to start taking the region seriously and accelerate its integration with the bloc.

  • Bank for International Settlements Warns of market crashes It could complicate monetary policy tightening.

news figures

  • The share of profits of multinational corporations in tax havens has vanished did not fall After policymakers began to address the problem after 2015, new research has come to the fore. As global profits have continued to rise, so have the associated tax losses.

  • British Healthy life expectancy is getting worsewrites Sarah O’Connor.

Lex newsletter – Follow a message from Lex hubs around the world every Wednesday, and review the best comment of the week every Friday. Participation over here

without hedging Robert Armstrong explains the most important market trends and discusses how the best minds on Wall Street respond to them. Participation over here

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We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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