Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
Carbon hitting the brakes after four-fold gain
Ole Hansen
Head of Commodity Strategy
The EU Carbon Emission contract (EMISSIONSDEC18 and CFIZ8), which had become the 2019 version of Bitcoin, has slumped by 30% since Monday following a four-fold increase during the last year. The main reason behind the year-long rally was last year’s change in European regulations governing the availability of allowances. The idea behind the so-called Market Stability Reserve (MSR) mechanism for carbon allowances from 2019 was to drive up the price of carbon emissions and thereby force a move away from coal to cleaner fuels such as wind, solar, hydro, and not least gas. A power plant using coal has to buy twice the amount of allowances as plants burning natural gas.
The unintended result has been a huge speculative wave of buying which helped drive the price higher until reaching €25/ton on Monday. With speculative more than commercial traders driving the price higher, it did not take much of a change to remove at least some of the speculative froth. According to the Financial Times, the reason for the correction this week may have been triggered by comments from Poland’s energy minister calling for the EU to look at intervening in the market. Poland relies heavily on coal to power its utilities while a major consumer like Germany still produces close to 40% of its electricity from coal.
Consumers and utilities alike have all suffered the consequence of higher carbon emission prices. The cost of electricity in some areas have risen beyond the elevated levels seen last winter during the “Beast from the East” surge.
Looking ahead, the upside may find some resistance from the increased focus on political intervention and signs of improved supplies from gas, hydro, and wind power. From a trading perspective, some massive call option bets on the December contracts have also played its part in the recent price volatility. As the market goes up sellers of the options have to buy futures to hedge a rising delta while the opposite is the case in a falling market. When the volatility at the same time jumps from around 40% to above 60% it suddenly becomes very difficult to hold a position.
The sell-off has paused today with the price bouncing after finding support at €17.70/t, the trendline from January.
The unintended result has been a huge speculative wave of buying which helped drive the price higher until reaching €25/ton on Monday. With speculative more than commercial traders driving the price higher, it did not take much of a change to remove at least some of the speculative froth. According to the Financial Times, the reason for the correction this week may have been triggered by comments from Poland’s energy minister calling for the EU to look at intervening in the market. Poland relies heavily on coal to power its utilities while a major consumer like Germany still produces close to 40% of its electricity from coal.
Consumers and utilities alike have all suffered the consequence of higher carbon emission prices. The cost of electricity in some areas have risen beyond the elevated levels seen last winter during the “Beast from the East” surge.
Looking ahead, the upside may find some resistance from the increased focus on political intervention and signs of improved supplies from gas, hydro, and wind power. From a trading perspective, some massive call option bets on the December contracts have also played its part in the recent price volatility. As the market goes up sellers of the options have to buy futures to hedge a rising delta while the opposite is the case in a falling market. When the volatility at the same time jumps from around 40% to above 60% it suddenly becomes very difficult to hold a position.
The sell-off has paused today with the price bouncing after finding support at €17.70/t, the trendline from January.
The carbon correction has also brought some relief to the European power market.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...