CO2 Market

Spooked markets across the board

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by Bernadett Papp, Vertis

October saw a sweeping ache across markets for the coronavirus cases started resurging at record numbers seeing as winter kicks off in Europe and the U.S .

Excess froth removal on stock markets

Equities witnessed an excess froth removal in October affected by the uncertainty surrounding the U.S. elections, President Donald Trump testing coronavirus positive at the beginning of the presidential race debates, the shattered hopes for a U.S. stimulus package before the presidential elections, bursting tech equities bubble, and aching economies because of the virus speedy resurgence. The Dax and EuroStoxx 50 composites posted 3% and 2.5% average monthly loss respectively and concluded October at levels last seen end of May 2020. The EUA Dec-20 benchmark contract posted a 12% month-on-month loss prompted by the sharp declines seen on fundamentals and equities besides the sharp rise in covid-19 cases in Europe and consequent lockdowns. Dec-20 broke important support levels during October including the historically strong 200 day moving average.

A bleak horizon for the Eurozone Q4-20 economic outlook

Multiple countries in the EU took a U-turn towards more restrictive measures to curb the spread of Coronavirus after the number of infections grew globally to above 42 million cases, and 1.2 million deaths. Europe alone accounts for 22% of the global caseload, and over 23% of the global deaths. Towards the end of October, the UK, Germany, France, followed by Austria, and to a lesser extent, Portugal announced the re-imposition on nation-wide lockdowns that would entail massive losses to the hospitality sector, one of the already most hit by the pandemic around the globe. Flashbacks from the first coronavirus wave are causing a backlash from citizens who are protesting the new measure across Europe for their anticipated financial toll on governments as well as citizens. The outlook thus for Q4-20 is rather gloomy despite the QoQ GDP gains posted across the Eurozone in Q3-20, 12.7%; an expectation that pushed the European Central Bank to pledge potential additional relief measures in December, a move that rather exposes the depth of the cracks the EU economy suffers because of covid-19.

“Now is the time for our businesses to prepare for a no-deal Brexit!”

The popular sentence of prime minister Boris Johnson summarizes last month’s negotiations between the EU and the UK.  Johnson addressed UK based businesses to start preparing for a no-deal Brexit after the 15 October deadline he sat for withdrawing from the talks had no progress been made.  The rupture between the two negotiating parties grew as tension intensified over the two critical topics of competition level playing field, and fisheries.  Towards end of October, the two negotiating parties tuned down their threats, and agreed on extending the negotiations through mid-November with some positive signs showing on the competition level playing field front.

55% is not enough

The EU regulatory arms put the EU climate law and green deal under the spot in their October sessions. In their plenary session in mid-October, the EU Parliament (EP) supported a higher 2030 emissions reduction target of at least 60% compared with Commission’s proposed 55%. The parliament also voted in favor of 2050 climate neutrality obligation to all the 27  EU member states.  In a later session, the parliament’s Environment Committee signaled a strong support for scrapping off EU ETS free allocation if the EU if the bloc introduces a Carbon Border Adjustment Mechanism . The position is rather aligned with the EU watchdog report, released in September, of the inefficiency of free allocation in tackling decarbonization . The EP also called for a more coordinated global effort to reduce the shipping sector emissions by more than 50% by 2050.

The European Commission too addressed the extension of the EU ETS to shipping sector in their process to align carbon market with the 2030 emissions reduction target. It postposed its final decision on the percentage of reduction until the end of year plenary session in December giving most fossil fuel dependent member states the chance to assess the impact of the different targets on their economies.

November preview

By examining the past 7-years carbon price trends, since the start of Phase III, the EUA price marginally depreciates in November by an average 0.46%. The depreciation has been historically driven by the lower market appetite as installations approach the end of their fiscal years.

21 primary auctions offer a total of 85.117 million allowances in November with a 1.54% month-on-month reduction. The last EUAA auction of the year offering 891,500 allowances takes place during the first week of November with no further EUAAs auctioned until January 2021.  While the reduction in the auction volume might cushion  additional price drops, it might get counterbalanced by lower demand appetite, and lower emissions across the EU for the current restrictions in place until December.