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Markets assess the scale of Putin’s gas weapon

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 15 July 2022.

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The scheduled shutdown of a transit pipeline for scheduled annual safety maintenance sent a shudder through currency markets. The taps were closed on Nord Stream 1, resulting in Russian gas flows to Germany dropping to zero. The euro fell to parity with the dollar for the first time in 20 years after markets considered the implications should Moscow delay turning the taps back on as a means of excerpting pressure in its fight against sanctions imposed on the country following its invasion of Ukraine. China scuppered a western attempt to cap prices on Russian oil sales to help defund its war machine. When pressed on its continuing support for Russa despite its military action, Beijing declared: “It’s complicated.”

The point where central banks will see that inflation has peaked and decide their actions and words have had the desired effect will come soon. For the moment, the Fed will remain more hawkish than the markets. Central banks prioritise inflation ahead of growth.

Over the week, the blue-chip FTSE 100 index was down 1.5% by mid-session on Friday, with the more UK-focused FTSE 250 1.4% lower.

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Ukraine conflict

Russia turned off the taps of the largest gas pipeline to Germany on Monday for its scheduled annual round of maintenance. Worries over the impact on Europe if Vladimir Putin pulled the trigger on the ‘gas weapon’ propelled the euro down to parity with the dollar for the first time in two decades. The pipeline work is expected to last for ten days.

Opec’s first oil-market outlook for 2023 failed to bring good tiding for squeezed consumers, with the cartel conceding it needed to pump more oil – despite most members already operating flat out. Years of underinvestment and regional political instability means this investment and infrastructure issue is not easily resolved. Opec expects global demand growth will exceed the increase in supplies by one million barrels a day next year. This weekend, US President Joe Biden is in Saudi Arabia to discuss “energy supply, human rights, and security cooperation”.

China refrained from supporting the US-led calls for a price cap on Russian oil while continuing to call for dialogue to address the “complicated issue”. The comments followed US Treasury Secretary Janet Yellen raising the possibility of setting a cap on the price of Russian oil during a virtual meeting with Chinese Vice-Premier Liu He last week.

Economics

Inflation across America during June was higher than that expected by economists yet again – putting increasing pressure on the Federal Reserve. In the year ending June, US headline inflation hit 9.1% compared with a consensus view of 8.8%. This prompted chatter that the next US interest rate increase could be a historic 100-basis-point move. Prior to the release of the CPI data, market futures had priced just a 0.2% chance of a 100 basis-point hike this month. After the CPI data dump, that percentage surged to 33% before easing back. Equities wobbled so the Fed sent out its cavalry in the form of Fed Governor Christopher Waller and Fed Bank of St. Louis President James Bullard. Both men said they would back a 75-basis-point hike in July, easing the concerns that caused the stock market to fall.

A collapse in consumer confidence is exactly what central banks want. As people worry about the ‘cost-of-living’ crisis they are likely to become more cautious – and this frugality will help ease price pressures.

The UK economy showed unexpected strength in May.

The high price of Beijing’s ‘zero-Covid’ strategy is becoming clearer as the year progresses. The Asian nation’s economy narrowly escaped a contraction in the second quarter. The world’s second-biggest economy expanded 0.4% on a year-on-year basis, below the 1.2% analysts’ consensus view, and down from the 4.8% hit in the first quarter. The data raised expectations that Beijing would inject hundreds of billions of dollars of stimulus into the economy to shore up growth. It also hit commodity markets, as concerns about poor growth in the world’s largest consumer of commodities hit prices hard –, particularly copper – and sent the Bloomberg Industrial Metals Index to a 17-month low.

However, it was not all downbeat in the economic data cycle. The UK economy showed unexpected strength in May, with 0.5% growth following April’s 0.2% decline (revised from a 0.3% drop). Growth was fuelled by a boom in holiday bookings, but every area of the economy expanded – including construction, travel and manufacturing. However, businesses reported that higher running costs had led them to put up prices.

The International Monetary Fund warned that avoiding a recession in the US will be "increasingly challenging" as it again cut its 2022 growth forecast to 2.3% from 2.9%, as recent data showed weakening consumer spending.

German investor expectations slid in July amid worries about a potential energy crunch. The headline ZEW investor expectations index slumped to -53.8 from -28.0 in June, coming in well below expectations for a reading of -38.3. Meanwhile, the current situation index declined to -45.8 in July from -27.6 the month before. ZEW President Professor Achim Wambach said: "The current major concerns about the energy supply in Germany, the ECB’s announced interest rate hike and further pandemic-related restrictions in China have led to a considerable deterioration in the economic outlook.”

Geopolitics

Geopolitical tensions were again very evident in the South China Sea. A Chinese fighter jet had an “unsafe” and “unprofessional” interaction with a US special operations aircraft in the area last month and reports of increasingly aggressive military actions by Chinese pilots involving Australian and Canadian aircraft. This week a US destroyer sailed near the disputed Paracel Islands in the South China Sea, drawing an angry reaction from China. Beijing said its military had "driven away" the ship after it illegally entered its territorial waters.

Technology

Twitter is suing Elon Musk after the billionaire abandoned his $44bn takeover bid, asking a judge to force him to follow through on his offer. Lawyers for Twitter told a Delaware judge that the world’s richest man failed to honour his agreement to pay $54.20 a share for the San Francisco-based social media platform. Musk abandoned the deal citing concerns about the number of fake accounts among users.

Financials

The US billionaire Bill Ackman will return the $4bn (£3.4bn) he raised for the biggest-ever special purpose acquisition company (Spac), after failing to find a suitable target company to take the public through a merger. Mr Ackman wrote to shareholders in Pershing Square Tontine Holdings to say he would return the sum, blaming the faster-than-expected economic recovery from the Covid-19 pandemic for the failure. It is a significant blow to the billionaire, who had planned for the investment vehicle to take a stake in Universal Music Group last year when there was a Spac craze on Wall Street.

Travel

Heathrow Airport told airlines to stop selling summer tickets, as the UK's biggest airport struggles to cope with the rebound in air travel. The airport is limiting the number of passengers who can depart each day over the peak summer months to 100,000, 4,000 fewer than currently scheduled. Airports and airlines, which cut jobs during Covid lockdowns, have struggled to recruit staff as demand for holidays has returned. Emirates rejected Heathrow’s request to stop selling summer tickets, branding the move as "unreasonable and unacceptable". Putting a jet engine on its hyperbole machine, Emirates then claimed the West London airport now faced an “airmageddon”.

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Markets assess the scale of Putin’s gas weapon

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