European stock markets and euro slide as gas prices rebound sharply

European stocks and the euro fell sharply after Russia’s decision to cut off gas supplies to the EU prompted a nearly 30 percent rebound in natural gas prices.

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

Russia’s Gazprom announced it would stop pumping gas through the Nord Stream 1 pipeline, causing UK and Dutch wholesale prices to plummet by 133 percent and 140 percent, respectively.

Susannah Streeter of Investment and Markets Analysts at Hargreaves Lansdown said: “Europe’s energy crisis has entered another critical phase following the indefinite shutdown of the Nord Stream pipeline.

“These are the worst-case fears that European leaders braced themselves for.

“The gas shutoff appears to be Russia’s response to a proposed price cap on its oil, which is expected to cause blackouts and rationing and further financial pain for businesses and consumers across Europe.

“The price of natural gas futures traded in Europe previously rose 30 percent before falling slightly. This huge jump will fan the flames of inflation and increase calls for emergency government assistance.’

EU governments are preparing multi-billion dollar packages to save the bloc’s energy companies from a final liquidity crisis and protect consumers, while the bloc has accused Russia of arming supplies in retaliation for sanctions.

Like the UK, the eurozone is also facing an impending recession as record high inflation of 9.1 percent hurts consumer spending power.

Markets currently see a roughly equal chance of the European Central Bank raising interest rates by 50 basis points or 75 basis points later this week.

Jan Felix Gloeckner, Senior Investment Specialist at Insight Investment, said: “Pressure is mounting on the European Central Bank to make a 75 basis point hike at its September meeting and the decision is likely to be the subject of much debate at the meeting.

“With inflation soaring and the risk of unintended consequences of persistent inflation, the case for frontloaded 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 drop in wholesale gas prices may still be enough to force a slower normalization path. Either way, we are on the verge of the first bout of positive interest rates in the eurozone in over a decade.’

Sterling was also under pressure, hitting a post-pandemic low of $1.1444 in response to mounting recession fears.

New figures showed the UK economy ended August on a much weaker basis than previously thought, as overall business activity fell for the first time since February 2021.

S&P Global revised its composite purchasing managers’ index, which covers the services and manufacturing sectors, to 49.6 from a preliminary ‘flash’ read in August of 50.9.

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

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

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

“It must show financial responsibility to prevent sterling from falling any further and it can do so by upholding the independence of the Bank of England. Otherwise there is a risk that interest rates will once again become a political tool.

“The Government must also recognize that the UK is slipping down the ranks of the world’s largest economies and to reverse this decline it must introduce policies that make the UK more attractive to foreign investment, including by rolling back the recent corporate tax increases and support for the new free ports.’