Euro, Stocks Tumble as Russia Pulls Rug on Gas Supplies

European stocks dropped for the sixth time in seven days, and the euro sank to a 20-year low, after Russia escalated the continent’s energy crisis by shutting off key gas taps, signaling a long cold winter ahead for businesses and households in the region.

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(Bloomberg) — European stocks dropped for the sixth time in seven days, and the euro sank to a 20-year low, after Russia escalated the continent’s energy crisis by shutting off key gas taps, signaling a long cold winter ahead for businesses and households in the region.

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European nations led by Germany announced measures over the weekend to tackle a cost-of-living crisis and spiraling energy prices after Russian state gas producer Gazprom PJSC Friday said it would indefinitely halt supplies through the Nord Stream pipeline.

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The common currency dropped as much as 0.8% to 98.78 US cents on Monday, the weakest since 2002. Europe’s benchmark Stoxx 600 fell as much as 1.7%, led by automakers and chemicals companies. Germany’s DAX Index and Italy’s FTSE MIB both tumbled more than 2%, while safe-haven German bonds fell in volatile trade, pushing the 10-year yield 3.1 basis points higher.

The gas halt “is another blow to the European economic outlook, which has left the euro weak in the near term due to governance-related risks,” said Piet Philip Christiansen, chief strategist at Danske Bank in Copenhagen. 

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“At the same time, yet another stimuli package from Germany is an attempt to keep growth afloat, which makes inflation forecasting and the job for the ECB more tricky.” 

This may lead to additional tightening due to prolonged inflationary pressures, pushing front-end yields higher, he added.

Read More: Throttled Trade Gives Euro Bears Even More Reason to Hit Sell

The energy crisis has been deepening since Russia’s invasion of Ukraine pushed commodity prices sharply higher and damaged relations between the Kremlin and Europe. This was a significant factor pushing the euro to parity with the dollar last month for the first time in two decades. The new strains on energy supplies ahead of the winter threaten to put a further drag on the regional economy at a time when soaring consumer prices are putting pressure on the ECB to tighten monetary policy. 

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Read More: Europe’s Energy Crisis Deepens After Russia Keeps Pipeline Shut

Lagarde’s Challenge

There are growing expectations for the ECB to raise rates by 75 basis points as soon as Thursday. The decision remains a challenging one as chief Christine Lagarde and her colleagues manage the twin problems of high inflation and an impending recession. 

“At some point markets may start to question how much inflation central banks are willing to tolerate if economies slip into recession, especially if that root of that inflation is supply driven,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Weaker growth, or recession, and a weaker labor market are ultimately the price to be paid, but prolonged elevated energy prices could temper the extent to which the ECB moves both this week and over the cycle.”

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In a sign of the severity of the problem, Germany unveiled Sunday a relief plan worth about 65 billion euros ($65 billion) while Finland said it would stabilize the power market with a $10 billion program. Sweden on Saturday announced a $23 billion emergency backstop for its utilities as it seeks to head off a broader financial crisis. 

Read More: Nordic Utilities Get $33 Billion Backstops as Power Markets Fray

Goldman Sachs Group Inc. analysts led by Kamakshya Trivedi cut their forecasts for the euro to 97 cents over the next three months from 99 cents previously, they said in a note Friday before the various relief packages were announced. They also believe the euro will remain below parity with the dollar over a six-month period. Previously they forecast a recovery to 1.02 dollars.

“While the euro area has made good progress in amassing gas storage for the coming winter, this has come at the cost of significant demand destruction via production cuts, and does not totally eliminate the risk of a more severe disruption over the winter,” they said in the note.

(Adds comment, update bund move from third paragraph.)

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