Marketmind: Powell shock meets power shock
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[August 30, 2022] A
look at the day ahead in U.S. and global markets from Mike Dolan.
Even as U.S. markets readjust to the harsher interest rate horizon that
emerged from last week's Jackson Hole conference, storm clouds overseas
are impossible to ignore for those fearful of global recession and
eye-watering inflation.
Europe's blinding Russia-related energy price shock - where wholesale
natural gas prices are more than five times where they were a year ago
and electricity contracts for next year up to 10 times pricier than 12
months ago - reinforces the inflation, interest rate and recession risks
across the Atlantic.
With Russian gas through the Nordstream 1 pipeline expected to halt
again for maintenance for three days from Wednesday, anxiety levels in
energy and power markets reached fever pitch again on Monday. And now
the European Union is being forced to consider intervention that may
involve price caps and a rethink of the entire gas-driven electricity
pricing market.
Germany, which has warned for months about the need to avoid a Lehman
Brothers moment for the energy sector, tried to calm the horses this
week by showing its winter gas storage well ahead of schedule, ongoing
domestic and EU support and the prospect of subsiding prices.
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The prospect of EU-wide action pulled power and natural gas prices back
sharply from their peaks on Tuesday - but the cost to governments of
easing the burden and serial bailouts is being counted in bond markets.
What's more, wider energy worries were aggravated by higher crude oil
prices this week as unrest in Iraq added to a disturbing geopolitical
picture.
Currency markets have been one way that macro markets have tried to
price the U.S.-Europe differential hit - sending the dollar soaring
again over the past week against the euro and sterling. It slipped back
again on Tuesday as European energy prices eased.
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Federal Reserve Board Chair Jerome
Powell leaves after a news conference following a 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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But the prospect of even higher inflation is goading the European Central Bank
and Bank of England into higher interest rate rises, with futures markets now
leaning to a 75bp hike from the ECB at its next meeting and a peak BoE rate next
year in excess of the Fed at almost 4.5%. There was some relief that August euro
zone inflation readings this week were leveling off but the coming winter energy
shock means higher rates are due.
Global stock markets and U.S. futures caught a break on Tuesday after two days
of heavy selling on Fed worries and hopes of some break in the European energy
crunch.
Key developments that should provide more direction to U.S. markets later on
Tuesday:
* U.S. September Consumer Confidence report
* U.S. July JOLTS data on job vacancies
* U.S. Corporate Earnings: Best Buy
(By Mike Dolan, editing by Gareth Jones mike.dolan@thomsonreuters.com. Twitter:
@reutersMikeD)
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