Russian halt to gas flows deals another blow to Europe

Market movers today

Energy price developments remain in focus this week after Gazprom said it would fully suspend the Nord Stream natural-gas pipeline to Germany, raising pressure on Europe as governments race to avoid energy shortages this winter. Markets will look out for clues about EU measures to cap the rapid price rises in energy markets ahead of the energy minister meeting on Friday.

The final round of the UK Conservative Party leadership election takes place today, with polls largely favouring Liz Truss to become the UK's next Prime Minister, see Research UK - Truss vs Sunak - and why it matters, 2 September.

Services PMIs for August are released in a range of countries and we look for a further deterioration Swedish Services PMI.

Judging from the German numbers, euro area retail sales could see a small rebound.

Overnight, we expect Reserve Bank of Australia (RBA) to hike by another 50bp. RBA has signalled a data-dependent meeting-by-meeting approach and elevated inflation expectations and tighter labour markets point to further policy tightening.

US markets are closed for the Labour Day holiday. Investors will keep an eye on the OPEC+ meeting today following comments from Saudi Arabia about the possibility of output cuts, despite pressure from the US to increase supply.

The main event this week will be the ECB meeting, where we look for a 75bp hike.

The 60 second overview

Russian halt to gas flows triggers risk-off move in markets: News Friday of the continued closure of the North Stream 1 pipeline spurred a sell-off in equities, pushed bond yields lower and weakened the euro. Energy rationing may have moved one step closer in Europe. The negative sentiment carried over to the Asian markets overnight. Bond markets also got support from a weaker-than-expected US jobs report, which showed softening job growth while more people are returning to the labour market.

German relief package: After gas flows through the North Stream 1 pipeline remain suspended, the German government reached an agreement on a third relief package over the weekend. Amounting to EUR 65bn (on top of EUR 30bn from earlier packages), measures include one-off payments to students and pensioners, increased welfare payments, subsidized public transport tickets, a brake on electricity prices for basic consumption, extension of various KfW programmes, postponed increase in carbon prices and support for an EU wide profit cap on energy companies. According to Finance Minister Lindner the measures will be fully funded and not lead to additional net borrowing, while compliance with the 'debt brake' in 2023 still remains the overarching goal. While the package will probably help mitigate the blow to consumers from rising energy prices, we doubt it will suffice to avoid the German economy falling into recession in H2 22. With demand conditions already weakening and a prolonged Russian gas shut-off increasing the risk of rationing and outright production stops in some industries, Europe is headed for a challenging winter (see also Research Germany - Zeitenwende, 25 July).

Sweden and Finland offers credit guarantee to power companies: The two countries on Sunday announced credit guarantees worth USD 33bn to power companies to avert "technical bankruptcy".

Equities: Equities ended lower Friday after a turnaround in the US cash session. MSCI was lower for six consecutive days with defensive Min Vol outperforming. Huge regional difference as Europe rallied on a goldilocks NFP report. US cash session started out strong but news that Russia decided to keep North stream 1 shut took down the brewing optimism. What's interesting to note is that implied volatility measured by the VIX index fell Friday for the third day in a row. This tells us something about lack of surprise factor or the fact that professional investors are already prepared for market turmoil. Friday performance Dow -1.1%, S&P 500 -1.1%, Nasdaq -1.3% and Russell 2000 -0.7%. Asian markets are mixed this morning with Chinese markets suffering. European futures are down 3% this morning while US futures are slightly higher.

FI: A wait and see market sentiment ahead of the US labour market report was followed by gradually lower yields in the afternoon as the US participation and unemployment rate rose, which may question the wage growth strength in the period ahead. Also central bank pricing was somewhat lower on the back of the NFP where we particular take note of the ECB's at +223bp of hikes priced by summer next year and the 66bp for this week's ECB meeting.

FX: Naturally, 1) the announcement of an G7 oil price cap on Russian oil, 2) the shutdown of NS1 gas to Europe (due to 'maintenance') and 3) Germany's announcement of intervention in the energy market (taxing low-cost energy producers and subsidizing consumption), as well as 4) Swedish liquidity provisions to energy companies are all set to take centre stage as the European energy crisis continues. On Sunday evening, EUR/USD has opened down some 20-30pips from Friday's close. This is quite noticeable given spot is near its short-term low but generally also that early Asian hours see very muted volatility in the currency, in general.

Credit: Credit markets moved sideways on Friday until the release of the US job report, which led to substantial tightening, with iTraxx Main tightening 6.6bp and Xover 30bp.

Nordic macro

During the weekend the Swedish government announced the intention to support electricity produces who are members of Nasdaq Clearing AB with up to SEK 250bn in credit guarantees. The proposal is supposed to pass the Riksdag today before market close and should help avoid possible spill-over-effects to the wider financial market.

After the Swedish august Manufacturing PMI number from last week confirmed a continued decline in activity, we do not expect to see anything different from the Services PMI number being released at CET 8:30 today.