All eyes are on the euro this morning as the single currency slips to the brink of parity with the US dollar for the first time in two decades. Concern over poor European growth and growing fears that Russia may cut off gas supplies are weakening the euro. The euro fell as low as $1.0006 against the dollar in early trading today, a new 20-year low, compared with over $1.13 at the start of this year. The euro/dollar exchange rate over the past 20 years Photo: Refinitiv Russia shut down the largest pipeline carrying natural gas to Germany on Monday for annual maintenance. This project is expected to last for 10 days, but governments, markets and companies are concerned that the shutdown of Nord Stream 1 could be extended due to the war in Ukraine. If Vladimir Putin decides to cut gas supplies to Europe this winter, countries such as Germany could face gas rationing – potentially forcing industries to suspend work and leaving families struggling to heat their homes. Fiona Cincotta, senior financial markets analyst, at City Index, says: Fears are growing that Russia may not turn gas supplies back on for 10 days when the projects are finished. This could cause a recession in Europe. LETTER OF THE DAY: And Germany is counting the days. The Nord Stream 1 pipeline stopped transporting Russian gas to Germany (only a residual amount is still flowing now). It is annual maintenance, scheduled from July 11th to July 21st. Berlin fears the pipeline may never return to service. pic.twitter.com/HCdagmIbGs — Javier Blas (@JavierBlas) July 11, 2022 Robert Habeck, Germany’s economy minister, warned on Saturday of the “nightmare scenario” of a permanent cutoff to the flow of Russian natural gas. “Everything is possible, everything can happen,” Hambeck told broadcaster Deutschlandfunk: “Maybe the gas is flowing again, maybe more than before. Nothing may also come. “We have to honestly prepare for the worst case scenario and do our best to try to deal with the situation.” Rising energy prices and supply chain disruption due to the war in Ukraine had already threatened to push Europe into recession. Investors are also concerned that a growing number of Chinese cities, including the commercial hub of Shanghai, are introducing new restrictions to combat outbreaks of the highly contagious Omicron sub-variant, BA.5. The dollar is benefiting from that uncertainty, plus concerns that US inflation could hit a new 40-year high on Wednesday. That could lead to more aggressive rate hikes, boosting the US currency, especially after a better-than-expected US jobs report last Friday eased recession worries.
THE AGENDA
9 a.m. BST: Deputy Governor of the Bank of England Jon Cunliffe: Speech on Cryptocurrency Market Developments at the British High Commission, Singapore 10 am. BST: ZEW Eurozone Economic Confidence Survey 11 a.m. BST: NFIB US Business Optimism Index for June 6 p.m. BST: Bank of England Governor Andrew Bailey: Speech at OMFIF ‘The Financial Landscape’
Updated at 07.15 BST Important events: Filters (BETA) Key events (3) Europe (5) United States (3) Germany (3) Russia (2) Eurozone (2) There is a risk appetite in the markets this morning, explains Victoria Scholar, Head of Investments at interactive investor. “European markets opened lower as risk sentiment from Asia carries over into the European session. Key data on US inflation and China’s GDP are in focus this week as markets remain jittery amid Europe’s energy crisis and China’s coronavirus restrictions. The utilities and oil and gas sectors are shrugging off the negativity, while the FTSE 100 is posting more modest losses than the FTSE MIB and DAX leading the leg lower.” 🔔 European Opening Bell 🔔 🇬🇧 FTSE 100 Down 0.54% 🇪🇺 STOXX 50 Down 0.69% 🇪🇺 STOXX 600 Down 0.37% 🇩🇪 DAX Down 0.6% 🇫🇷 CAC 40 Down 0.62% pic.twitter.com/6jowUew9ve — PiQ (@PriapusIQ) July 12, 2022 European stock markets fell in early trading. Britain’s FTSE 100 was down 35 points, or 0.5 percent, at 7,161, with mining companies falling as recession worries hit commodity prices. Commercial real estate companies are also falling. Germany’s DAX fell 0.75% as concerns over natural gas supplies weighed on the Frankfurt stock market. A whisker from the Euro-Dollar rate now… The euro is getting closer and closer to parity with the dollar. It is now trading at just $1.0005 amid concerns that the shutdown of the Nord Stream 1 gas pipeline for maintenance could become permanent. The euro against the US dollar this month Photo: Refinitiv Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, says: “While we believe that an interruption of Russian gas supplies to Europe is a real possibility, which would trigger a recession across the Eurozone with three consecutive quarters of economic contraction, there are also good reasons to assume that gas supplies will resume after the maintenance. .”
Pound hits two-year low amid leadership race
The pound has fallen to a new two-year low against the dollar this morning, weighed down by political uncertainty and economic gloom. Sterling weakened to $1.185 this morning, its lowest since March 2020, as the race to replace Boris Johnson intensifies, with several candidates promising tax cuts. The Conservative Party’s 1922 Committee set the timetable for choosing a new Conservative leader and prime minister last night, and aims to announce the winner on September 5. Adam Cole of RBC Capital Markets says: As expected, the Commission set a relatively high limit of 20 for the number of MPs needed to “endorse” each candidate, and as such, several of the 11 who have so far declared themselves as candidates are likely to drop out quickly. Back-to-back rounds of voting among Conservative MPs are expected to narrow the shortlist down to the final two candidates before parliament goes into summer recess (next Thursday). The final vote (among all Conservative Party members) is expected on 5 September. Bookmakers currently have Sunak as favorite (31% chance), followed by Mordaunt (29%) and Truss (20%). Markets are likely to see Sunak as the fiscally conservative candidate, with the immediate tax cuts promised by most of the other candidates putting some upward pressure on interest rates if the prospect of his victory continues to grow. Updated at 08.36 BST
Deutsche Bank: Uncertainty over Russian gas may linger until August
Deutsche Bank fears uncertainty over Russian gas supplies to Europe will persist next month. DB strategist Jim Reid told customers this morning there were “significant disruptions” as the Nord Stream pipeline under the Baltic Sea begins its scheduled 10-day maintenance. European natural gas futures (-6.10%) fell yesterday after rising for four straight weeks, thanks to news late last week that Canada would return a turbine for the Nord Stream pipeline after the government issued him a “time-limited and revocable” license that removed her from the sanctions. That said, there are still significant concerns about whether the pipeline will be brought back into service after maintenance is completed, which meant the euro itself fell even closer to parity against the US dollar. [That turbine would help Nord Stream 1 to run at full capacity] The euro weakened to near parity as markets grappled with the prospect of what a complete shutdown of Russian gas would mean for the European economy, Reid adds: Speaking to DB’s Peter Sidorov yesterday, he tells me that the uncertainty about natural gas may remain as even if Russia needed this part of the turbine to restore stronger gas flows, the technical logistics may mean it would need an extra week or two to integrate into the pipeline. Thus, uncertainty may remain until early August. The euro’s weakness could prompt the European Central Bank to raise interest rates later this month for the first time since 2011. That would help it catch up with other central banks, including the Federal Reserve and the Bank of England, which have already started raising borrowing costs to fight inflation. But… the ECB will struggle to raise interest rates as quickly as the Fed, even though eurozone inflation is at a record 8.6%. This is due to recession fears and the risk of “fragmentation” (a widening of borrowing costs between stronger and weaker members, as happened in the eurozone debt crisis). Mohit Kumar of investment bank Jefferies explains: We expect the euro to move towards parity and beyond given the divergent stance between the Fed and the ECB. European stock markets are set to open lower as concerns about growth and a possible gas supply disruption weigh on markets. EUROSTOXX 50 DOWN 0.9%, DAX DOWN 0.9%, FTSE DOWN 0.6%, IBEX DOWN 0.85% — *Walter Bloomberg (@DeItaone) July 12, 2022 The next few weeks could be difficult for Europe, with maximum uncertainty likely to extend into August, warns Stephen Innes, managing partner at SPI Asset Management. Investors increasingly believe that natural gas may not start flowing again through Nord Stream 1 after scheduled maintenance on July 11-21, with further “temporary” outages possible. If so, Germany will likely be forced into stage 3 of its gas emergency plan sometime in August, meaning rationing and forced shutdowns of chemicals and other production components, which could shave a few percentage points off Germany’s GDP. Euro at 20-year low, within a cent of parity with the dollar. High inflation and the prospect of energy shortages – should Russia cut gas supplies to Europe this winter – raise the prospect of a recession. The euro was trading around $1.15 in February — Andrew Neil (@afneil) July 12, 2022
Introduction: the euro on the brink of parity with the dollar
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