The euro is coming under increasing strain as the depth of the energy shortage from the Iran war comes into clearer focus.
European countries are highly dependent on oil from the Middle East and — particularly — natural gas from Qatar as vital energy sources. Prices of benchmark European gas have surged and that will deliver a hit to the economy.
The jump in oil will also complicated the picture for the ECB as it attempts to engineer a drop in inflation back to target. Europe is unlikely to get dragged directly into the war but it’s now in a position where it’s very difficult to obtain reliable energy supplies.
I will be carefully watching bond markets as energy subsidies could also deliver a hit to state budgets.
As for the euro, the fall to a three-and-a-half month low is also inflationary and reverses all of the progress since November. Technically, a break of the November lows would be an ugly outcome on the chart and could lead to a quick move down to 1.11, where there is stronger support.
Here is a good chart from Bank of America highlighting energy exposure via the proxy of energy as a percentage of national market cap. That’s skewed somewhat by large international companies like BP but the names at the bottom are the ones most-impacted.
This article was written by Adam Button at investinglive.com.
