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OPINION

Updated January 6th, 2024 at 18:03 IST

Capital Calls: Cognac, Euro zone inflation

Investors wiped nearly 10 billion euros off the combined market capitalisation of French drinks trio LVMH

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Capital Calls: Cognac, Euro zone inflation | Image:Facebook
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Dry January. Investors wiped nearly 10 billion euros off the combined market capitalisation of French drinks trio LVMH, Pernod Ricard and Remy Cointreau on Friday, after Chinese authorities announced the launch of an anti-dumping probe on European brandy makers. If Beijing’s move is part of a wider trade row with the EU, and a tit-for-tat response to Brussels’ probe on Chinese electric vehicles, the reaction may be excessive.

Remy, the 5 billion euro group where cognac sales are 65% of revenue, was hit harder than French peers less dependent on the brandy. Its shares fell 12%, against 5% for Pernod and 2% for LVMH. Still, Jefferies points out that a similar probe on European wines 10 years ago ended after both sides struck a deal on their trade dispute of the moment – in that case on solar panels.

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But cognac makers’ problems predate the Chinese probe, and they will persist even if it does not materialise. After a bumper 2021 when sales jumped more than 30% globally as drinkers tried to forget the pandemic, they have faced unrelated headwinds. Back in November, Remy announced first-half cognac sales in free fall, down 30% because of the Chinese economic slowdown and the diminished appetite of U.S. consumers for bling-bling drinks. Even if this trade spat fizzles out, investors may still need a stiff drink. (By Pierre Briancon)

Tough sell. The acceleration in euro zone inflation in December was expected. More importantly, the “core measure”, which excludes energy, food, alcohol and tobacco, dropped to a 21-month low. That puts the refusal by European Central Bank President Christine Lagarde to discuss rate cuts even more at odds with market expectations of a looser policy.

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Headline inflation in the 20 countries sharing the euro rose at an annual rate of 2.9% in December from 2.4% a month earlier, according to the first official estimate released on Friday. That is mostly due to the waning effects of energy subsidies. Those factors are likely to be reversed in January. Core inflation, on the other hand, fell to 3.4%, from 3.6% in November. And prices of food, alcohol and tobacco increased by 6.1%, down from 6.9% in November.

Admittedly, services inflation remained robust at 4%. But with the euro zone economy flirting with recession, these numbers suggest the ECB should stop refusing to even discuss lowering borrowing costs. Investors expect seven rate cuts this year, which would bring the benchmark deposit rate to around 2.5% from the current record of 4%, according to derivatives prices collected by LSEG. As inflation numbers drop, so does the credibility of the ECB’s hard line.

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Published January 6th, 2024 at 18:03 IST

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