DAX & EUR fall as the energy crisis deepens – Daily Market Brief, September 5, 2022

The DAX is set to open 3% lower after Russia halts gas flows to Europe along Nord Stream 1 indefinitely.

·         EUR/USD falls below 0.99 for the first time since late 2002

·         GBP/USD tumbled towards March 2020 lows, near 1.14, ahead of the new Prime Minister announcement

·         Oil rises ahead of the OPEC+ meeting

Stocks in Europe ended last week on higher ground, but the same can’t be said for Wall Street. While the US non-farm payroll report helped ease fears of aggressive Federal Reserve bets, the upbeat mood in the market reversed.

The non-farm payroll report showed that 315k new jobs were created in August. More people joined the labour market, most likely due to the rising cost of living, increasing the participation rate and lifting unemployment to 3.7%, up from 3.5%. More people returning to the jobs market should help cool wage growth and inflationary pressures.

Russian gas flows

The late selloff on Wall Street after news that Russia has stopped gas flows to Europe along the Nord Stream 1 pipeline indefinitely is putting Europe on track for a sharply lower start on the open.

Natural gas prices in Europe have jumped higher in early trade, and the DAX is set to open 3% lower as investors weigh up the deepening energy crises, possibly gas rationing, rising inflation, and slower growth.

This puts pressure on the ECB ahead of the monetary policy meeting on Thursday, where the central bank is expected to hike rates again. The only question is will it be 50 or 75 basis points?

Data today is expected to show that economic activity in the eurozone contracted in August, with the composite PMI falling to 49.2 from 49.9.  Retail sales are expected to inch higher to 0.4% MoM in July after falling by -1.2% in June.

EUR/USD has fallen below 0.99 for the first time since 2002 as the picture in Europe deteriorates and amid relentless demand for the safe haven USD.

The US stock market is closed today in observance of the Labor Day public holiday.

GBP/USD

The new UK Prime Minister and the new leader of the Tory Party will be announced today. Foreign secretary Liz Truss is ahead in the polls and widely expected to win. She will inherit a dire economic situation of surging energy prices, double-digit inflation, and sharply slowing growth. Truss has supported tax cuts as a tool to boost the economy. However, there are growing fears that this strategy could lift inflation further.

GBP/USD is trading just off 2020 lows of 1.14, reflecting concerns over the outlook for the UK economy, which is gloomy at best. A fall below here could see GBP/USD drop to its lowest level since 1985.

Oil

After falling over 6.5% last week, oil prices are climbing higher as investors consider the likelihood of an oil production cut. OPEC+, which includes Russia, will meet later today to discuss production levels for October. 

The meeting comes after Saudi Arabia said that the output cut could be discussed to stabilize prices. Oil has dropped 30% from its June high as concerns over slower global growth hurt the demand outlook. With COVID cases in China also rising, the oil cartel will be keen to keep output at current levels or lower to boost the price. That said, reports suggest that Russia is not in favor of a supply cut, so OPEC is most likely to hold steady today.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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