Shares ease, euro squeezed by energy crunch

The euro lost 0.3% to $0.9918 and looked likely to test its recent 20-year low of $0.99005 as markets priced in more risk of a European recession.

EUROSTOXX 50 futures slid 3.0% and FTSE futures 1.1%.

Germany announced plans to spend 65 billion euros ($64.7 billion) on shielding customers and businesses from rising costs, while Finland and Sweden offered liquidity guarantees to keep power companies open.

Oil prices jumped along with the whole energy complex as a holiday in U.S. markets made for thin trading conditions. News of more coronavirus lockdowns in China only added to the jittery mood, with blue chips down 0.6%.

MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.4%, and Japan’s Nikkei was off 0.2%.

Wall Street fared a bit better having already dropped late on Friday, with S&P 500 futures edging up 0.2% and Nasdaq futures 0.1%.

The energy crisis is an added complication for the European Central Bank (ECB) as it meets this week to consider how much to raise interest rates.

“Europe is faced with a dire energy outlook, with numerous anecdotes of firms cutting back production,” said Tapas Strickland, head of market economics at NAB.

“The ECB will undoubtedly decide to hike rates this week,” he added “Markets are close to fully pricing in a 75bp hike after numerous ECB officials said they were leaning that way, though there is still likely to be a debate around 50 v 75.”

Euro, Sterling struggle

Central banks in Canada and Australia are also expected to raise interest rates this week, while Federal Reserve Chair Jerome Powell and several other policy makers will make appearances and are likely to sound hawkish on inflation.

While the August U.S. jobs report showed some welcome signs of cooling in the labor market, investors are still leaning toward a hike of 75 basis points from the Fed this month.

The two-year U.S. Treasury yield did fall almost 12 basis points on Friday and futures were trading flat on Monday amid general risk aversion.

The shift to safety again benefited the U.S. dollar, which hit another two-decade high on a basket of major currencies at 110.040 .

The dollar was holding at 140.20 yen , just short of Friday’s 24-year top of 140.80.

Sterling was struggling at $1.1485 , after diving as deep as $1.1458 and levels last seen in March 2020 at the start of the pandemic.

“We now expect the EUR/USD and GBP/USD rates to reach $0.90 and $1.05 respectively next year as the economic slowdown and the terms of trade shock hitting the region take their toll,” said Jonas Goltermann, a senior economist at Capital Economics.

British foreign minister Liz Truss said on Sunday she would set out immediate action in her first week in power to tackle rising energy bills and increase energy supplies if she is, as expected, appointed prime minister on Monday.

The strong dollar kept gold flat at $1,710 an ounce .

Oil prices were supported by expectations gas prices would leap in Europe later in the day.

“Ultimately, Germany would need to cut natural gas consumption by 15% to keep gas storage facilities from running empty,” said analysts at ANZ. “Gas rationing looks very likely, as even at 95% full, storage would only last 2.5 months.”

OPEC+ is meeting on Monday and is likely to keep oil output quotas unchanged for October, although some sources would not rule out a small production cut to bolster prices that have slid due to fears of an economic slowdown.

Brent was up $1.73 at $94.75, while U.S. crude rose $1.63 to $88.50 per barrel.