Euro Area
The EU’s transition to a carbon tax launched this week via its Carbon Border Adjustment Mechanics (CBAM) will lead to higher inflation in the medium term (3 – 5 years out), and will stoke consumer (i.e., voter) antipathy if it becomes effective in 2026. As a result, the tax will be watered down. Food and energy prices are particularly at risk, as imported fertilizers, and electricity-generation and -transmission components made from steel and aluminum are affected by the CBAM. We remain long oil, gas and metals equity exposure via the XOP, XME and COMT ETFs. We also remain long gold to hedge inflation.
Introducing our Special Series to assess where Portugal, Italy, Greece, and Spain stand today. Stay tuned for more.
European stocks and the euro continue to weaken; soon, they will test the bottom of their recent trading range. Which sectors can protect investors against this downdraft?
We continue to expect Brent crude to trade just above $101/bbl in 4Q23, and to average $118/bbl in 2024. Higher volatility looms. We expect Russia will cut oil production next year as part of a concerted effort to undermine Biden’s re-election. Oil-demand volatility is set to rise in response to divergent policy imperatives. We continue to favor equity exposure to oil and gas via the XOP ETF; direct exposure via the COMT ETF, and long Dec23 $100/bbl Brent calls. We are getting long Jan-Feb-Mar 2024 Brent futures vs. short the same months in 2025 expecting steeper backwardation as inventories draw and markets tighten.
