August 16, 2022

European Shares Pare Gains Over Gas Supply Worries

European shares came down from their session highs, after a report that force majeure had been declared by Gazprom in Russia on some of the gas supplies to Europe. This ended up fueling worries about an energy crisis for the European continent.

Indexes cut gains

The continent-wide STOXX 600 index that had recorded gains of about 1.5% in the session to hit a high of three weeks earlier cut its gains and ended the day up by 0.9%. The German DAX index also ended the day higher by 0.7% but had come down from gains of 1.5% that it had recorded earlier in the session, before the news of gas supplies taking a hit.

Reuters saw the letter in which Gazprom, which is the largest exporter of Russian gas by pipeline, said that it could not give a guarantee of gas supplies due to ‘extraordinary’ circumstances that were beyond its control.

According to a trading source, this was in reference to gas supplies that are brought to Germany via the Nord Stream 1 gas pipeline from Russia.

Gas concerns

The Nord Stream 1 gas pipeline was closed the previous week for annual maintenance and it is scheduled to reopen on July 21st. However, investors had already been concerned that the resumption of gas supplies could be stalled by Russia because of its war with Ukraine.

This would be gas supply shortages in Europe and keep prices elevated for a longer duration. Market analysts said that things would become difficult for Germany, as they would have to pay more for energy and their manufacturing industry would also take a hit, as will live in general. If the German economy takes a hit, it is likely to reverberate throughout the eurozone.

Upbeat session

Earlier in the day, markets had been enjoying a stronger session, as worries about a 100 basis points interest rate increase from the US Federal Reserve eased off and news of fresh stimulus in China amidst COVID-19 flare-ups helped.

Miners were leading the gains, as they rose 3% and oil and gas were not far behind, as they rose 2.8%. There was also a 2.1% gain recorded in banks. This week, the European Central Bank is also going to be the focus, as it is scheduled for its monetary policy meeting on July 21st.

The ECB is expected to increase the interest rate for combating the soaring inflation that has already hit 8.6%. There has been a 14.4% drop in the STOXX 600 index year-to-date because of the global aggressive tightening by central banks, the slowdown in the Chinese economy, which is the world’s second-largest economy, and the fallout of the Russia and Ukraine conflict. All of these have had an impact on risk sentiment.

This has also put the euro under pressure significantly, as last week the common currency hit parity with the US dollar, even though it was able to recover. But, as long as the economic outlook is uncertain, the euro will continue to suffer.

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