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September 28, 2021

Energy prices are skyrocketing around the world, with major consequences for financial markets as investors worry about the state of the economic recovery.



Current happening
Global markets are stumbling Tuesday as energy prices soar. One big problem has been shortages of natural gas, triggered by low stocks and a jump in demand as activity recovers from its Covid-19 lull. Wholesale natural gas prices in Europe hit fresh records on Monday and continue to rally Tuesday, according to Tom Marzec-Manser at market intelligence firm ICIS. In the United States, natural gas futures have also jumped, surpassing levels last hit in 2014, when temperatures plunged across much of the country.

 
China is contending with a worsening energy situation, too, as it tries to reduce its reliance on coal just as demand for domestic-made goods is swelling. Companies in the country's industrial heartlands have been told to limit their energy consumption, according to state media, while supply has also been cut to some homes — reportedly trapping people in elevators.

Asia is now "scrambling" to secure natural gas for immediate delivery "in the same way Europe is," Marzec-Manser told me. And while the prices "are nowhere near comparable" in the United States, they're clearly on a steep upward trajectory, he added. The circumstances put growing pressure on national governments, which are trying to limit instability by shielding residents from the effects of higher costs and shortages. For investors, the fallout presents another key risk.
 
 
What are the Concerns
There were already concerns that the economic recovery was losing momentum in both the United States and China. Turmoil in energy markets only stands to make matters worse. Analysts at Nomura trimmed their forecast for Chinese growth in 2021 by half a percentage point to 7.7% on Friday, citing the "rising number of factories" that have had to "cease operations," either because of local energy consumption mandates or power outages due to rising coal prices and shortages.

Goldman Sachs followed on Tuesday, cutting its 2021 GDP growth forecast to 7.8% from 8.2%, pointing to "recent sharp cuts to production in a range of high-energy intensity industries." "Short-term economic activity will likely experience a greater drag from this shock than from Evergrande," Craig Botham, chief China economist at Pantheon Macroeconomics, told clients Tuesday, referring to the debt-laden Chinese real estate developer whose potential collapse is being monitored closely.

Declining Markets
Anxiety about rising energy prices is tied to broader fears about inflation, which have been pushing up bond yields. Higher yields, which move opposite prices, are encouraging investors to ditch high-growth tech stocks, which tend to perform better when bonds are more expensive. Shares of Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) are all down roughly 1.5% in premarket trading.

Oil prices, meanwhile, are shooting up, with Brent crude futures, the global benchmark, hitting their highest level in almost three years. US oil futures are also at their highest since October 2018. If the winter is colder than expected, and securing natural gas remains difficult, there could be a scramble for crude, keeping prices elevated. "Fuel oil may need to brace itself for the high gas and coal price situation bleeding into its own market,".