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Something for your Espresso: The melt up continues

Nikkei at 33-year highs again this morning as the melt-up continues. Falling inflation outpaces mediocre liquidity -and growth outlooks, which goes to show how a rapid disinflation can be seen as manna from heaven initially.
2023-07-03

Good morning from Europe.

It was a crazy day in European energy markets on Sunday as for example Western Germany had negative spot electricity prices for most of the day. From 4pm to 5pm the electricity in the “TenneT” zone in Germany traded as low as -1900 EUR pr MWh.

There are two take-aways from such a pricing:

1) This is a symptom of something bigger. Supply is outpacing demand again (also in Energy terms) and prices will adjust south. This is one of several micro-observations of outright deflation in prices in Europe over the past month or two.

2) Introducing more wind- and solar power to the grid from here will lead to EXTREME volatility in front-end electricity pricing as a sunny day with high winds (as yesterday) overloads the grid and vice versa if the weather is cloudy, dry and calm.

From a macro perspective, we’d argue that this observation adds to our understanding that European prices are about to come down fast now. We would not be surprised to see headline printing below 2% in the Euro zone already by September.

Chart 1: Tenne-T area prices printed at -1900 EUR pr MWh during the peak hours on Sunday

Nikkei at 33-year highs again this morning as the melt-up continues. Falling inflation outpaces mediocre liquidity -and growth outlooks, which goes to show how a rapid disinflation can be seen as manna from heaven initially.

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