European stock markets and euro slide as gas prices rebound sharply

European stocks and the euro have fallen sharply after Russia’s decision to cut off the EU from gas supplies led to a near-30 per cent rebound in natural gas prices.

The Euro Stoxx 50 index fell by around 2 per cent on Monday, while the key German, French, Dutch and Spanish benchmarks each fell by between 1.3 and 2.4 per cent.  The euro fell to $0.9923.

Russia’s Gazprom announced it would stop pumping gas via the Nord Stream 1 pipeline, leading to British and Dutch wholesale prices soaring 133 per cent and 29 per cent respectively, reversing declines seen last week.

European stocks sold off heavily in response to Russia’s decision to axe natural gas supplies 

Susannah Streeter, of investment and markets analysts at Hargreaves Lansdown, said: ‘Europe’s energy crisis has lurched into another critical phase after the indefinite shutdown of the Nord stream pipeline. 

‘These are the worst case scenario fears that European leaders had been bracing for. 

‘Turning off the gas taps appears to be a response by Russia to a planned price cap on its oil, designed to cause blackouts and rationing and further financial pain for companies and consumers across Europe. 

‘The price of natural gas futures, traded in Europe surged by 30 per cent earlier before dipping back a little. This huge jump will add fuel to the fire of inflation and intensify the clamour for emergency government help.’

The governments of the EU are preparing multi-billion euro packages to prevent the bloc’s energy firms from a terminal liquidity crunch and to protect consumers, while the bloc has accused Russia of weaponising supplies in retaliation for sanctions.

Like the UK, the eurozone is facing an impending recession as record high inflation of 9.1 per cent hammers consumers’ capacity to spend.

Markets currently perceive a roughly equal likelihood of the European Central Bank hiking interest rates by 50bps or 75bps later this week. 

Jan Felix Gloeckner, senior investment specialist at Insight Investment, said: ‘Pressure is building on the European Central Bank to deliver a 75bp hike at their September meeting and the decision is likely to be the subject of significant debate at the meeting. 

‘With inflation skyrocketing, coupled with the risk of undesired consequences from inflation persistence, the argument favouring a front-loaded tightening is clear.

‘Central bank credibility remains a critical factor in anchoring longer-term inflation expectations. 

‘However, a rapidly weakening economic outlook and a sharp pullback in wholesale gas prices may yet be sufficient to force a slower path of normalisation. Either way, we’re about to see the first period of positive interest rates in the eurozone for over a decade.’

Sterling has also been under pressure, reaching a post-pandemic low of $1.1444 in response to growing recession fears.

Fresh figures showed Britain’s economy ended August on a much weaker footing than previously thought as overall business activity contracted for the first time since February 2021.

S&P Global revised down its composite Purchasing Managers’ Index, which covers the services and manufacturing sectors, to 49.6 from a preliminary ‘flash’ August reading of 50.9.

A reading below 50 represents a contraction, which is a first since the lockdown periods of 2020 and 2021.

Britain’s new Prime Minister Liz Truss takes power at a time of a cost-of-living crisis, industrial unrest and an impending recession, and markets will be sensitive to how she goes about tackling these issues. 

Head of UK equities at Lazard Asset Management Alan Custis said: ‘The new government faces significant economic challenges and it must act quickly to address them. 

‘It must demonstrate financial responsibility to prevent sterling continuing to slide and can do this by maintaining the independence of the Bank of England. Otherwise interest rates risk becoming once again a political tool. 

‘The government must also recognise that the UK is sliding down the ranks of the largest economies in the world, and to reverse this decline it must introduce policies that make the UK more attractive for inward investment, including by reversing the recent corporation tax increases and supporting the new freeports.’

This post first appeared on Dailymail.co.uk