Germany Is No Exception... European Asset Sell-Off Rush

Germany's government bond yields rose 0.7% last month, the largest increase since 1990
Concerns over recession grow due to Russia's gas supply cuts... UK pound also plunges 4.5%

[Asia Economy Reporter Park Byung-hee] Soaring inflation and fears of central bank tightening have combined to trigger a sell-off of European assets in the financial markets.

According to major foreign media on the 31st of last month (local time), the Bloomberg Pan-European Total Return Index, which reflects yields on European government bonds and investment-grade corporate bonds, fell 5.3% last month. This marked the largest monthly decline since the Bloomberg Pan-European Index began compilation in 1999. As concerns over a European economic recession grew, investors massively sold off European bonds.

Due to the sell-off, the yield on Germany's 10-year government bonds, considered the safest asset in Europe, surged by 0.7 percentage points in August alone. This was the largest monthly increase since 1990. The yield on the UK's 10-year government bonds rose by 1 percentage point.

The reason for the European government bond sell-off is that Russia has reduced gas supplies, increasing investor anxiety about the European economy. With energy and food prices soaring and consumer prices hitting record highs for ten consecutive months, the possibility of a giant step (a 0.75% base rate hike) by the European Central Bank (ECB) is also rising.

Even Germany, Europe's largest economic power, is in a precarious situation.

Russian state-owned gas company Gazprom halted operations of the Nord Stream 1 gas pipeline connected to Germany for 10 days in July due to scheduled maintenance, and from this day, it again stopped the pipeline for three days for maintenance. In Europe, fears are growing that Russia might completely cut off gas supplies this time.

On the day the Nord Stream 1 pipeline was halted again, Germany's Economy Minister Robert Habeck said, "Soaring gas prices are affecting not only large corporations but also Germany's mittelstand."

Mittelstand refers to the medium-sized enterprises that form the backbone of Germany's manufacturing powerhouse economy. In other words, Russia is shaking the very roots of the German economy.

Minister Habeck warned, "German manufacturing is based on cheap and abundant Russian gas," adding, "This strength will not recover quickly and may never be regained."

Robert Habeck, German Vice Chancellor and Minister for Economic Affairs and Climate Action
[Photo by Reuters]

Even if Russia resumes gas supply three days later, Europe is unlikely to avoid an energy shortage because Gazprom has already reduced supply through the Nord Stream 1 pipeline by 80%.

Minister Habeck said that due to reduced gas supply, electricity prices have risen sharply, causing some companies to halt production entirely, which he described as astonishing. Siegfried Russwurm, chairman of the Federation of German Industries (BDI), said, "The electricity price for delivery next year is over 700 euros per megawatt-hour (MWh), more than 15 times the average of recent years."

Europe's largest steel company, ArcelorMittal, decided to raise product prices as it could not bear the soaring electricity costs. Bloomberg reported, citing sources, that ArcelorMittal plans to increase the price of hot rolled coil by 13% starting November, supplying it at 850 euros per ton.

In France, concerns over a recession grew as the manufacturing Purchasing Managers' Index (PMI) fell below the baseline of 50 in July for the first time since February 2021. Gazprom declared on the 30th of last month that it would completely stop gas supply to France, citing unpaid gas bills for July. French Prime Minister ?lisabeth Borne stated that if energy supply problems arise this winter, energy rationing could be implemented in the worst-case scenario.

In the UK, fears of soaring prices due to gas supply shortages are increasing. Goldman Sachs warned that if natural gas prices do not stabilize, the UK's consumer price inflation could soar to 22.4% in January next year. Furthermore, it warned that the price surge could push the UK economy into recession, with GDP shrinking by 3.2% next year. Due to economic uncertainty, the British pound fell sharply by 4.5% against the dollar last month. This monthly decline was the largest since October 2016, right after the Brexit referendum (the UK's withdrawal from the European Union).

This content was produced with the assistance of AI translation services.