Daily Commentary

MarketMinder’s View: European gas prices are at their highest level in three years, echoing fears of 2022’s energy crunch following Russia’s invasion of Ukraine. The concern is understandable, but as legendary investor Benjamin Graham described it, in the short run, the market is a voting machine (where sentiment and feelings dominate) while in the long run, it is a weighing machine (in which fundamentals matter most). Said another way, sentiment can swing prices sharply as today’s fear surrounding the Iran conflict is stoking natural gas supply concerns. However, as this article explains, fundamentals suggest Europe’s energy supply isn’t in dire straits. While gas reserves are low after a cold winter, EU officials currently anticipate refilling storage to 90% before next winter. Also, while Qatar has become a natural gas powerhouse, the EU doesn’t rely on the Qatari gas alone. “Europe sources only about 10 per cent of its LNG [liquified natural gas] from Qatar,” with much larger quantities from America and Norway. Finally, Europe has another energy lever to pull that wasn’t available in 2022: “… France’s nuclear power base. Roughly half of the French 56 nuclear reactors operated in 2022 by EDF had to be shuttered for inspections and tube replacements following an issue with cracks, sending output to multiyear lows. That forced France to import electricity, often from countries using gas to generate it and contributed to spiralling prices.” Additionally, a crucial point: In 2022, LNG import infrastructure was lacking. It wasn’t just the gas, making it all the more scarce and shortages more likely. That is all built now as a result of 2022. Answering “where” the EU will get gas is easier than “where” and “how.” Now, this article cites a single tanker en route from Nigeria to France U-turning to head south, around the Cape of Good Hope, to Asia as an example of fierce competition siphoning gas from Europe. But hold your horses. Given the geography and massive costs and transit time involved with that rerouting, there is probably more going on that simply getting a better offer. Beware anecdotal evidence writ large. Despite the headline fears, Europe’s energy situation is in better shape than many think. For more, see this week’s commentary, “On the Iran Conflict.”

MarketMinder’s View: We have often written about the Fed’s overstated economic influence, as rate moves usually don’t do what the consensus assumes. A couple years ago, the Fed’s tightening cycle—which began in March 2022—had an unintended consequence: Mortgage rates climbed alongside Fed rate hikes, which conventional wisdom argues would lower housing demand (and by extension, prices). Yet housing prices didn’t cool significantly. Why? The higher mortgage rates dissuaded homeowners from selling, especially those who locked in a generational-low rate. That weighed on supply, and as this article shows, the US housing market (and folks who want to buy) is still dealing with the fallout. “The typical homeowner has stayed in their home for 12 years as of December, almost double the median tenure of two decades ago, according to a new report from brokerage Redfin. … For many homeowners, the cost of downsizing or relocating has grown too expensive. A lack of available housing has driven prices to record highs, but homeowners have little motivation to sell because so many are locked into low mortgage rates that they’re unwilling to give up.” Now, a supply-starved, stuck market won’t derail GDP or markets (though it is quite miffing for some of your friendly MarketMinder Editorial Staff located in the Bay Area), but the data here further highlight central banks’ limitations. For more, see our July 2023 commentary, “Seller Statis: The Fed’s Unintended Effect on Housing.”

MarketMinder’s View: After the Supreme Court ruled tariffs under the International Emergency Economic Powers Act (IEEPA) illegal two weeks ago, other legal battles kicked off. The one featured here: A federal judge from the US Court of International Trade ordered the Trump administration to create and implement a refund process. “Many trade lawyers said they were still deciphering the scope of the judge’s three-page directive. But they generally agreed that its mandate could prove short lived, with the Trump administration expected to quickly challenge it. … Much remained unclear from the court ruling, including how the government might issue refunds and when. The uncertainty underscored the complexity that awaits the Trump administration at a moment when the president is taking steps to revive his tariffs by other means.” Now, as the rest of the article explains, there are still a lot of details to sort out, especially since many importers are still determining how much tax they (might) still owe on last year’s imported goods as the cumbersome process of reconciling initial invoices with formal assessments continues. Those expecting a quick resolution to this shouldn’t hold their breath, but the legal process slowly removes uncertainty—an overall positive for markets. For more, see our February commentary, “On Tariffs, the Supremes Have Finally Sung.”