Market action was relatively muted overnight as the US market was closed for Labor Day. The focus was on the European energy crisis. European gas futures are up around 15%, while the EUR fell below 0.99 for the first time in 20 years before recovering. Likewise, the GBP broke below 1.15 yesterday, nearing a 37-year low, before it was confirmed that Liz Truss would become the new UK Prime Minister. European rates are slightly higher overnight while the US 10-year bond futures is about 5 basis points higher, reversing some of its downside after payrolls. The NZD had a quiet night, hovering just below the 0.61 level.
Dutch gas futures, the European benchmark, are up around 15% overnight (after spiking more than 30% at times) after news on Friday night that Gazprom has cut gas supplies to Europe through the Nord Stream 1 pipeline suspended indefinitely. European wholesale gas prices are trading around 30% below levels reached just over a week ago, but are still almost double what they were at the end of May. There are fears that Europe could face energy shortages if winter weather is colder than normal and no action is taken to reduce demand. In extreme cases, this could involve electricity rationing and set the stage for a major recession in the region.
Putin’s spokesman said there would be no resumption of gas supplies to Europe until sanctions were lifted, implying (unsurprisingly) that the real motivation for disrupting gas flows was to punish Europe, not technical defects in the turbine . The focus is now on Friday’s meeting of European energy ministers on the EU’s response to the crisis. A range of emergency measures are reportedly on the table, ranging from demand-cutting measures to caps on energy prices and a windfall tax on energy producers. French President Macron last night expressed his support for a windfall tax.
The broader asset market response was adequately gauged, suggesting that either investors already held a significant likelihood that Putin eventually halted gas supplies, or market participants believe the EU policy response will help mitigate the impact to mitigate The EUR broke below 0.99 overnight for the first time in 20 years amid the initial surge in gas prices, but it has since recovered to around 0.9925 and is now down just 0.25% on the day (the Most of the EUR’s decline was in reaction to the news that gas flows would be halted, which came on Friday evening – it was trading around 1.0030 before Gazprom’s announcement). Likewise, European stocks opened significantly lower, but there was a notable rebound during the trading session, with the EuroStoxx 600 index finishing down just 0.6%.
The GBP slipped below 1.15 yesterday, approaching its lowest level since 1985, although it also recovered overnight and is now back above that level. Sentiment on the GBP remains very negative amid the stagflation shock from higher gas prices and concerns over the policy mix proposed by new UK Prime Minister Liz Truss. Truss has proposed sweeping fiscal easing, including reversing the recent increase in Social Security and canceling the planned corporate tax hike, among other measures. The policy mix is controversial as it poses the risk of inflation rising further at a time when the Bank of England is already struggling with double-digit CPI inflation.
The UK newspapers have also reported that Truss is considering an energy price freeze to protect households from skyrocketing energy bills, although the exact terms (e.g. price levels and duration of the scheme and whether it will apply to all households or only to households with lower income applies) have not yet been decided. Truss is reportedly due to make an announcement on the energy crisis Thursday night. The FT reported that Truss’ full policy package, including support for energy consumers, will cost nearly £100bn interest on bonds. The UK 2-year rate was 10 basis points higher overnight, while the 10-year rate was 2 basis points higher, just under 3%.
The US bond market was closed for Labor Day, but futures markets are pointing to the 10-year rate rising about 5 basis points, partially reversing the move seen after the nonfarm payrolls figure.
In another new situation, the Chinese city of Guiyang, home to around 6 million people, will lock down large parts of the city for the next four days, the latest center to impose restrictions after more Covid cases emerge. Chengdu and large parts of Shenzhen are currently under lockdown while authorities conduct mass testing.
CNY remains under downward pressure amid ongoing concerns over China growth prospects and overall USD strength. USD/CNY closed yesterday at a fresh 2-year high around 6.9340. As USD/CNY approaches the key 7.0 level, authorities remain reluctant to pace Yuan depreciation. Overnight, the PBOC announced a reduction in the amount of foreign currency deposits banks are required to hold in reserve, a measure intended to support the yuan. The cut in the foreign exchange reserve ratio from 8% to 6% was the second such move in four months. PBOC yesterday pushed the daily yuan fixing higher than expected for the ninth straight day, signaling its unease at the pace of CNY depreciation.
It was a quieter night for NZD and AUD in light of the US Labor Day holiday, NZD drifted back below 0.61 and AUD back to 0.68, both currencies up around 0.2% so far this week favor.
OPEC+ announced a small cut in oil supply at its overnight meeting, a move hinted at by recent comments from Saudi Arabia but not expected by most analysts. Analysts view the 100,000 bpd production cut as a largely symbolic move and warn that if prices fall further, the cartel is poised to react. Oil prices are up overnight, with Brent crude up nearly 3% to nearly $96.
It was a quieter session in the domestic rates market yesterday, a welcome break from recent extremely high levels of volatility. Swap rates with maturities of 2 to 10 years ended less than 1 basis point from Friday night’s close, despite the massive drop in US rates after the nonfarm payrolls. Yesterday’s construction data surprised to the upside, suggesting upside risks to our GDP estimate of 1.5% q/q Q2.
The RBA meets this afternoon, with all but two economists polled by Bloomberg expecting a 50 basis point hike in interest rates and markets are 85% priced in for such an outcome. Focus will be on the RBA’s characterization of the policy outlook, with market prices split between 25 basis points and 50 basis points for the following two sessions. Governor Lowe will also speak later this week. The market is focused on the ISM Services Index tonight with the consensus market expecting a slight decline to a still healthy 55.4. Markit Services’ shockingly weak August PMI (44.1) likely warns of downside risk to this consensus estimate.
Select chart tabs
US$AU$TWI¥en¥uan€uroGBPBitcoin
Comments are closed.