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Analysis – European markets face 'new shock' as soaring gas prices fuel inflation fears

Tommy Wilkes, Yoruk Bahceli and Dhara Ranasinghe

LONDON (Reuters) – Natural gas prices appear to end Europe with yet another sharp rise Any hope that the inflation war will ease, financial markets are now bracing for higher prices, a faster pace of rate hikes and a deeper recession.

Just a few weeks ago, there were signs that U.S. inflation — which tends to lead a shift in the world economy — may be peaking, boosting stocks and reducing government borrowing costs. Investors are betting that the central bank will now pay more attention to the economic slowdown and that the peak of the rate-hike cycle is just around the corner.

Conversely, U.S. bank Citibank started the week predicting that UK inflation would surge to the highest level in nearly half a century in January 18.6%, the forecast dominated the headlines of British newspapers on Tuesday.

Another explosive rise in natural gas prices shows little sign of slowing, with Russia signaling a further export squeeze and European buyers scrambling for supplies ahead of winter.

Natural gas prices surged nearly 96% in August and this year %.

“The key is energy, energy, energy. There is an energy crisis, and honestly, the price of electricity is 10 times pre-COVID levels, which is a shock to the system,” said Thomas Costerg, senior economist at Pictet Wealth Management.

“The US and Europe are on different paths. We all know Europe’s Achilles heel is foreign energy, and now they are paying for it,” he said, referring to Europe’s reliance on Russian gas.

Graphic: Pipelines supplying gas to Europe –

‘complete reversal’

so it’s no surprise that the mood deteriorated quickly. World stocks fell 4.3% from last Tuesday’s 3-1/2-month high, euro fell below $1, dollar 18-annual US Treasury yield back to 3%.

Monica Defend, head of Amundi Institute, predicts that the euro will fall to $0. 96 By December, as the European economy weakens.

Graphic: Euro is destroyed –

People are getting more and more worried Central bankers gathered at this week’s Jackson Hole symposium are laying the groundwork for more aggressive rate hikes than previously expected. Investors were nervous with uncertainty about when the hike would end.

“Markets are increasingly confident that recession will be the dominant theme and central banks will be more dovish or easing in tightening policy,” said Richard McGuire, head of rates strategy at Rabobank. “Since the beginning of last week, the situation has completely reversed.”

High inflation

Take a look at market-based measures of inflation expectations. Short-term indicators in the euro zone and the UK jumped to record highs this week.

A long-term indicator for the euro zone, which is watched by the European Central Bank (ECB), rose to 2. 20%, after falling below the ECB’s 2% target in July.

European Central Bank policymaker Isabel Schnabel gave a final warning that inflation expectations could be “un-anchored” this week, with the central bank saying it had lost confidence in the central bank’s willingness to deliver on its mandate.

Societe Generale (OTC: SCGLY) strategist Kenneth Broux calls Schnabel’s comments a “groundbreaking moment,” as central bankers worry Inflation will not ease fast enough.

In the UK, a similar measure of inflation rose to 3.82% this week from 3.4% at the end of July.

Two-year UK government bond yield hits highest level since 2008, largest single since

Weekly increase Last week’s data showed that the inflation rate in July reached .1%. Investors on Tuesday were betting that the Bank of England would not stop raising interest rates until June 2023, at around 4.2%. Ahead of the inflation data, they expected a peak of 3.25% in March.

Eurozone markets also raised about 50 where they believe ECB rates will peak next year, Refinitiv data shows basis points to around 2%.

Graphic: Recession? –

Craig Inches, head of rates and cash at Royal London Asset Management , a rise in market-based inflation measures suggests that markets are now focusing on the “next round of inflation impacts.” Reasons include drought in Europe, a gas crisis and pandemic-related supply constraints in China.

“There seem to be many stories that point to more entrenched, embedded inflation,” he said, adding that the market is now asking itself “how high do interest rates need to be?”

Inflation expectations are also rising in the US, but the outlook for Europe looks bleaker.

“Inflation is expected to pick up in Europe in the fourth quarter, but the scale of the uptick we are now facing is a new event as it spikes again” Berenberg Chief Economist Holger Schmieding said.

“This is a new shock that was not foreseen a few weeks ago. ”



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