The euro fell below $1 for the first time since 2002 as the greenback attracted safe-haven buyers as well as support from the gap between interest rate expectations in the US and the euro zone. Investors have been spooked by business and consumer surveys pointing to a looming US slowdown, with the central bank’s ability to support markets hampered by runaway inflation. But fears of a recession are even more acute in Europe, where governments worry about gas cuts from Moscow, a worsening energy shock and cost-of-living crisis. Futures contracts linked to TTF, the European wholesale price for natural gas, were 2.4% higher at 173.25 euros per megawatt hour, more than double their level in early June. Currency markets are “discounting a severe European recession,” in the euro-dollar trade, BMO Capital Markets’ Greg Anderson and Stephen Gallo wrote in a note to clients. “This scenario has close ties to energy supply constraints,” they said, as well as “winter (or even summer) fuel rationing.” The yield on Germany’s 10-year Bund, a barometer of the cost of debt in the euro zone, fell 0.13 percentage points to 1.12 percent as economic uncertainty drove demand for the low-risk asset. Bond yields fall as prices rise. U.S. Treasury yields also fell, continuing to trade in a so-called inverted yield curve pattern that has historically predicted recessions. The yield on the 10-year note, which underpins the cost of debt globally, fell 0.08 percentage points to 2.92%. The two-year yield fell 0.07 percentage points to 3%. Brent crude, the oil benchmark, fell 4.5% to just above $102 a barrel. Analysts expect the Federal Reserve to raise interest rates by as much as 0.75 percentage points at its July meeting, from the current range of 1.5% to 1.75%. Futures markets point to a benchmark US interest rate just below 3.5 percent for early 2023. By comparison, futures are leading the European Central Bank to tighten monetary policy more slowly, pushing the deposit rate from minus 0.5 percent currently to just over 1 percent by next March. The dollar index, which measures the greenback against six currencies and is heavily weighted to the euro, added 0.1 percent in trade to its highest level in two decades. In stock markets, Wall Street’s S&P 500 rose 0.4 percent in early New York trading, while the tech-heavy Nasdaq Composite rose 0.9 percent. Europe’s Stoxx 600 rose 0.1%. The FTSE All-World index of developed and emerging markets has fallen more than 20% this year as higher interest rates raise borrowing costs and reduce stock market valuations. Investors are now readying the second-quarter corporate earnings season for news on how companies are being affected by inflation and weak consumer sentiment. “We see the bear market in two phases. The first part is rate driven and the second is earnings driven,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. “There’s going to be a recession and that’s going to cause a lot of weakness in earnings that haven’t started yet.”
