Morning Deal: Powell shock meets electric shock

Morning Deal: Powell shock meets electric shock

Federal Reserve Chairman Jerome Powell leaves after a press conference following the two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Frantz/File Photo

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A look at the day ahead in US and global markets by Mike Dolan.

Even as US markets adjust to a tougher interest rate horizon emerging from last week’s Jackson Hole conference, storm clouds overseas cannot be ignored for those worried about a global recession and charming inflation.

Europe’s blinding price shock linked to Russia – where wholesale natural gas prices are more than five times higher than a year ago and electricity contracts for next year up to 10 times more expensive than 12 months ago – is boosting inflation, interest rate and recession risks. across the Atlantic.

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With Russian gas through the Nordstream 1 pipeline expected to shut down again for three days of maintenance from Wednesday, anxiety levels in power and energy markets peaked again on Monday. And now the European Union is being forced to consider intervention, which may include price caps and a reassessment of the entire gas-powered electricity price market. Read more

Germany, which has warned for months about the need to avoid a Lehman Brothers moment for the energy sector, tried to calm its horses this week by showing its winter gas stocks well in advance, continued domestic and EU support and the prospect of lower prices. . Read more

The prospect of Europe-wide action has pulled electricity and natural gas prices sharply back from their highs on Tuesday – but the costs to governments of offloading and serial bailouts are being counted in bond markets. What’s more, broader energy concerns were exacerbated by higher oil prices this week as unrest in Iraq added to the troubling geopolitical picture. Read more

Currency markets were one way macro markets tried to appreciate the US-European differential hit, sending the dollar back up against the euro and sterling over the past week. , , It fell back again on Tuesday as European energy prices eased.

However, the prospect of even higher inflation is prompting the European Central Bank and the Bank of England to raise interest rates higher, with futures markets now tipping for a 75 basis point hike from the ECB at its next meeting and the BoE’s top rate next year to be surpassed by the Fed at nearly 4, 5%. There was some relief that August inflation data in the Eurozone leveled off this week, but the coming winter energy shock means higher rates.

Global stock markets and U.S. futures broke on Tuesday after two days of heavy selling on Fed concerns and hopes for some break in the European energy crisis.

Key events that should provide further direction for US markets later on Tuesday:

* September US Consumer Confidence Report

* July JOLTS US job vacancies data

* US Company Profit: Best Buy

European electricity prices
Reuters graphic
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By Mike Dolan, Editing by Gareth Jones [email protected] Twitter: @reutersMikeD

Our standards: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.

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