Europe’s Energy Problems Are Weighing on the Euro and Asian Stocks

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On Tuesday, Asian markets fell for the seventh straight day as a further surge in European energy costs fueled recession worries, pushed bond rates higher, and pushed the euro to 20-year lows.

European markets appeared to be following Asian shares. After falling overnight, the EUROSTOXX 50 futures and the FTSE futures were both down approximately 0.2%.

Benchmark gas prices in the European Union soared 13% overnight to a new high, having more than quadrupled in only a month to be 14 times higher than the decade’s average.

Citi analysts cautioned that if energy costs were not controlled, inflation in the United Kingdom may reach 18%.

Manufacturing surveys anticipated later on Tuesday in Europe and the United Kingdom were likely to underscore the harm being done to activity, with Germany forecast to be further in contractionary zone.

“Europe’s severe energy situation implies that the peak of inflation has not yet occurred, and the risk remains that high inflation will remain sticky for longer in the absence of additional forceful central bank intervention,” said Tapas Strickland, director of economics at National Australia Bank.

“It’s no wonder, therefore, that the dollar is nearing multi-decade highs versus a plunging euro and pound.”

The euro was trading at $0.9929 after falling 1% to a 20-year low of $0.99265 on Monday.

The break of the July low at $0.9952 was interpreted as a bearish indicator for a further decline, with little chart support remaining.

Sterling was trading at $1.1755, having fallen as low as $1.1743 during the onset of the epidemic in March 2020. The dollar index rose to 109.100, just shy of its peak in July.

Unease about China’s economy persisted in Asia, as a reduction in lending rates and rumours of a new round of state financing to property developers exacerbated the sector’s woes.

“It would be terrible enough for Chinese stocks if the economy’s difficulties were limited to the real estate sector,” said Oliver Allen, a market economist at Capital Economics.

“However, growth in the services sector is unlikely to accelerate significantly as long as China’s zero-COVID policies remain in place; the pandemic-linked export boom is winding down; and power constraints in areas of the nation look destined to stymie industry in the near future.”

Chinese blue chips were down 0.5% after receiving barely a brief boost from the latest policy relaxation. The Chinese yuan has dropped to nearly two-year lows.

 

Source: Reuters

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