The beginning of the new week has seen the pound fall as market sentiment deteriorated following fears the Chinese property sector will suffer from the Chinese mega developer Evergrande’s collapse. Additionally, fears of a global economic slowdown and a gas crisis have left the market in a risk off mode, with the pound lower against the safe havens of the US dollar, Yen and the Franc. Sterling was also lower against the euro and commodity currencies including the Australian dollar, New Zealand dollar and Canadian dollar.
The UK’s wholesale energy markets have risen recently due to a global increase in demand for gas after a prolonged cold winter that left gas storage facilities depleted, with increased energy demand across Asia. Prices have surged as a result of a global attempt to refill gas storages before the winter.
With half of the UK’s electricity coming from gas-fired power plants and a rising demand for gas power after a series of nuclear reactor outages and the recent closure of a major power cable that brings in electricity from France, the situation has generated concerns about the coming winter months.
The UK government is also taking part in discussions about a possible financial bailout to energy providers. Kwasi Kwarteng, the Business Secretary, has been in various meetings over the weekend and will continue to meet the heads of energy businesses this week, to explore the possible options amid warnings that many companies could go bust. One of the potential solutions that have been discussed is a bail-out fund and the industry is now fearing a financial collapse according to the FT.
Following his emergency meeting with energy companies on Monday, Kwarteng tweeted that he will update MPs this afternoon, and that the government is looking at different options to protect customers and to they have continuity of supply if their supplier fails, through a “Supplier of Last Resort” or a special administrator if needed. The energy price cap will remain in place he confirmed. A spokesman for the Prime Minister told reporters: “The price cap remains in place, as I say, to protect consumers from sudden increases in global gas prices and it will save them money this winter.”
With the possibility of millions of customers being unable to be served by failing companies, supply energy companies are requesting support from the government, and a "Northern Rock-style bad bank" could be created to house such customers without losing money.
The gas crisis comes ahead of Thursday's Bank of England policy meeting which is a crucial event for the pound. The Bank could warn the gas crisis could slowdown growth and possibly push back the timing of an interest rate hike.
Another event that has rattled the markets was the news that the Chinese mega developer Evergrande is heading for a corporate restructuring that could see investors lose tens of billions of dollars. Shares in Evergrande have plunged 17% and the group’s massive debt problems could trigger a broader sell off across all financial markets. Evergrande's importance to the Chinese economy is huge, as its debts amount to around $447 billion (US$315b). This is more than three times the entire debt load of the New Zealand government and two-thirds of all outstanding Australian federal debt.
The rising natural gas prices and the energy crisis, the potential of produce shortages and surging inflation have already painted a rather dire image of the global economy. The Fed’s meeting this week and the German election create further uncertainty. Monday’s major shock for the markets came from Evergrande’s meltdown and investors could possibly avoid China. These are now being factored in by the markets, and it will be especially revealing to see how the Fed will position itself in terms of another rate hike amid inflationary pressures.
The pound has hit a four-week low this Monday as investors turned to safer assets, but GBP currency traders will be looking at this Thursday’s BoE meeting for more guidance.
If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.