European equity markets are already reflecting a more pessimistic outlook relative to energy price moves than they did during the 2022 energy crisis, JP Morgan’s EMEA equity research team argues in a note published on Sunday.
The bank says investors are increasingly drawing comparisons with 2022, but identifies five significant differences that it believes make a repeat of that episode unlikely.
The Euro Stoxx 50 index has already fallen 11% as European natural gas prices have doubled from 30 to 60, a one-time move, whereas in 2022 the index fell 20% only after gas prices spiked more than four times, from 70 to 300.
JP Morgan says this means equity price moves relative to gas price moves are materially more bearish in the current episode than they were in 2022.
The bank acknowledges that newsflow remains a significant source of volatility, with market sentiment oscillating between signals of escalation and reports of productive negotiations.
On the economic backdrop, JP Morgan points out that wage growth is not accelerating as it was in 2022, when Covid-related labour supply constraints were still feeding through into inflation.
Central banks also entered 2022 with policy rates well below neutral and were forced into an aggressive catch-up cycle, a dynamic the bank says does not apply today.
Consumer balance sheets and corporate pricing power, both strong in 2022, have also weakened, reducing the economy’s capacity to absorb higher input costs.
Eurozone growth momentum is running at around 1% currently, compared with more than 4% at the start of 2022.
Perhaps most significantly, JP Morgan flags the growing anxiety around artificial intelligence and its potential impact on employment, arguing that this could prove the crucial variable determining whether a stagflation or a deflation narrative ultimately takes hold.
The bank adds that any early interest rate increases could quickly come to be read as a policy mistake, raising the probability of a subsequent reversal.
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