Eurozone’s economic recession worries are rising, financial markets are afraid to intensify turbulence
The euro fell sharply against the US dollar on the 5th, hitting a 20-year low point. Major stock indexes in Western Europe fell sharply, and hedge funds bought a large number of German government bonds. Analysts pointed out that the intensification of the natural gas crisis triggered investors’ serious concerns about the economic recession in the entire eurozone. In the future, any emergency that affects the supply of natural gas in Europe may have a major impact on the financial market again. Eurozone countries are facing the most serious natural gas crisis in decades. With the intensification of geopolitical tensions in Eastern Europe, the European Union’s natural gas transmission from Russia has decreased significantly since the middle of June, and the gas transmission volume of the Nord Stream 1 pipeline alone has decreased by about 60%. The annual maintenance of Nord Stream 1 will start on July 11, and the production will be stopped for 10 days. However, experts predict that the pipeline will be shut down for a longer time, and even the Russian natural gas supply may be completely shut down from now on.
To make matters worse, on July 5, some oil and gas workers in Norway, the largest natural gas producer in Western Europe, began to strike, putting greater pressure on the already tense European natural gas supply situation. Norwegian oil and gas company said in a statement that the strike planned to further escalate on July 9 may reduce natural gas exports from Norway’s continental shelf by 56%. The main contract price of natural gas futures on the Dutch TTF exchange once soared to 175 euros/megawatt-hour on Tuesday, which means that the price of natural gas in Europe has doubled since the middle of June.
The further surge in European natural gas prices has triggered investors’ concerns about the economic recession in the entire eurozone. The serious risk aversion brought about by this concern hit the euro and European stocks hard, and significantly pushed up the price of risk-free German government bonds.
During the European trading session on Tuesday, the exchange rate of the euro against the US dollar fell sharply, and it broke through the key support level of 1.0300 to 1.0235 without any effort, hitting a 20-year low. Online broker markets Neil Wilson, chief analyst at Markets.com, warned that this meant that parity between the euro and the dollar was only a matter of time. Unless the European Central Bank succeeds in defusing inflationary pressures without causing economic stagnation and can prevent excessive increases in financing costs in heavily indebted euro countries.
Panicked investors are selling stocks in large numbers at the same time. At the close of Tuesday, the European benchmark stock index Pan European Stoxx 50 index, and the German benchmark DAX index fell by 2.68% and 2.91% respectively. Among them, the DAX index has refreshed the low point of the year. In the past June, Germany’s DAX index fell by 11%, which is also the worst June report card in its history; The pan European Stoxx 50 index fell by 9%. Many professional investors have been selling stocks in eurozone countries.
At the same time, risk-free sovereign debt is sought after. With the rise of bond prices, the yield of ten-year German treasury bonds, the benchmark of medium and long-term market interest rates in the eurozone, fell by more than 15 basis points on Tuesday compared with the previous trading day, and this index has fallen by 75 basis points from the eight-year high (1.937%) set on June 16.
Antoine Buvi, an analyst at ABN AMRO, said that even if there was not much support from the news, market investors were increasingly aware of the risk of recession.
Another sign of concern about the economic recession is that the iTraxx European cross-index, a measure of the insurance cost of the risk exposure of European high-yield bonds, which is the sub-investment-grade corporate bonds, rose above 600 basis points for the first time since April 2020, while it was still 430 basis points at the beginning of June. This means that professional investors now have to pay 6% of the investment amount every year to avoid comprehensive losses. Similar investment-grade debt indexes are also rising sharply, reaching the highest level since March 2020. The assessment of German commercial banks shows that the interest rate increases now expected by eurozone investors are far lower than that in the middle of June. This fact also reflects investors’ increased fear of economic recession.
In the money market, investors expect the European Central Bank to raise interest rates by about 140 basis points this year. Three weeks ago, the value was still more than 190 basis points.
Analysts pointed out that when traders weighed Germany’s efforts to deal with the natural gas supply crisis and the threat of Norway’s strike on natural gas supply, European natural gas prices are expected to remain near a four-month high. And before there is no peaceful solution to the Ukrainian crisis, any emergency affecting the supply of natural gas in Europe may once again cause a major impact on the financial market.
The federal government of Germany plans to complete the revision of relevant laws this week to rescue troubled energy companies and prevent the natural gas supply crisis from spreading to the wider economy. Uniper SE, which has applied for state aid, will become the first crisis enterprise to receive government funding. The bill also includes a mechanism to partially pass on soaring natural gas costs to consumers.
By Josie
