Tumultuous times

World Markets

European and UK stock markets are expected to open sharply lower today, as investors fret over the economic risks facing the region, including geopolitical developments, further energy shortages, and slowing growth coupled with soaring inflation.

In fact, the escalating energy row between Moscow and the West is set to occupy investors’ attention in the week ahead after Moscow vowed to keep its main gas pipeline to Germany shut. Nonetheless, UK political development will most likely be under the spotlight in the first half of the week as Monday and Tuesday will see the announcement and appointment of the UK’s new prime minister. Additionally, the European Central Bank and Christine Lagarde are set to deliver a big rate hike on Thursday whereas Federal Reserve Chair Jerome Powell is due to make an appearance before the central bank goes into its blackout period before its next meeting at the end of the month.

The UK prepares for an important day today as the Conservative Party will unveil their new leader, with Liz Truss being the overwhelming favourite. Whereas tomorrow, Tuesday 6th September, the new PM will officially take office after being appointed by the Queen to succeed Boris Johnson. Their roadmap to the UK’s current economic headwinds will be key: extra support for businesses and households will be of utmost importance with Brexit issues also expected to return to the forefront if Truss wins. Nonetheless, Ahead of the Tory party’s leadership announcement, there will be some financial news releases. In fact, investors will be looking for more meat on the bone in terms of commentary on current trading and the outlook for the rest of 2022. UK services sector PMI data will be of interest, mid-morning, but may be drowned out by the headlines from Westminster.

The Euro seems set for a very volatile and turbulent week losing ground in early trading hours this morning. The standoff over Russian gas and oil exports escalated Friday after Moscow vowed to keep its main gas supply pipeline to Germany shuttered. The latest Nord Stream pipeline shutdown, which Russia says will last for as long as it takes to carry out repairs, added to fears of winter gas shortages that could pull major economies into recession and lead to energy rationing. The latest development has seen the euro fall below 99 cents to the dollar for the first time in over two decades. Europe has accused Russia of weaponizing energy supplies in what Moscow has called an “economic war”. Nonetheless, Moscow blames Western sanctions and technical issues for supply disruptions. Ultimately, the European Commission has warned that a full cut-off of Russian gas supplies to Europe, if combined with a cold winter, could reduce GDP across the European Union by as much as 1.5% if countries did not prepare in advance.

Concluding last week’s stretch of US economic data was the release of the monthly employment report: Non-Farm Payrolls. Friday’s employment report for August was a mixed bag – while the economy added more jobs than expected, wage growth moderated and the unemployment rate ticked higher. In fact, non-farm payrolls rose by 315,000 through the middle of the month, a slowdown from July’s 526,000 but clearly ahead of consensus forecasts for a 300,000 gain. Wage growth also eased by more than expected, with average hourly earnings rising only 0.3% rather than the 0.4% expected. As such, the annual rate of earnings growth stayed at 5.2%, well below the current rate of inflation. Ultimately, the mixed reading keeps alive the ongoing debate over the size of the next Fed hike. Nonetheless, expectations for aggressive Fed action have solidified since the hawkish speech by Powell at the Fed’s Jackson Hole conference last month.