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Europe Insights

23 January 2023
    Download the full reportPDF, 2.3MB


    Over the past fifteen years, Asian countries have been growing as trade partners to Europe, with China now standing as the top source of Europe’s imports at 16 per cent of the total. This edition of Europe Insights explores the region’s key trade relationships as well as the current fixed income landscape, with ECB policy tightening pressures and the rapid rise in high yield bond financing costs.

    Trade’s checks and balances

    • China has emerged as a top trade partner to Europe, on par with the US – each currently makes up around 12 per cent of eurozone total trade, ahead of the UK and Poland (at around eight per cent each)
    • An over-reliance on powerful partners can be a potential risk to economic resilience. Now that the energy shock has tipped the eurozone into a current account deficit, and despite the recent collapse in gas prices, the region must rethink its trade relationships
    • European integration so far has been made possible through complex and increasing regulation. The path ahead is likely to be similar, including striking new trade agreements while keeping checks and balances, so that national commercial interests do not undermine the region’s strategic cohesion

    The ‘China effect’

    • Out of all major economic regions, European companies derive the highest amount of revenue from foreign (non-European) sources. China alone accounts for eight per cent of Europe’s foreign revenue exposure
    • Among the large European industries, the ones with the highest China revenues exposure are materials (chemicals, commodities, and mining) followed by luxury goods, energy, and autos

    Tightening pressures

    • The European Central Bank (ECB) took policy tightening a step further by announcing plans to start reducing its holdings of government debt from March 2023
    • In our view, European government bond yields are set for a volatile year amid a data-dependent policy setting. The market has already priced in quite a lot of tightening
    • While the rapid rise in high yield bond financing costs may threaten the solvency of a minority of issuers, this brings out both fundamental and technical positives by strongly incentivising all issuers to either improve their credit quality or avoid issuing