HONG KONG: Markets in Europe tumbled on Monday and the euro hit a fresh 20-year low on growing fears about an energy crisis after Russia said it would not restart gas flows to the continent, while traders are also preparing for another interest rate hike this week.
The selling came after a mixed day in Asia, where the positive vibes from a United States jobs report were offset by growing fears about the European outlook, as well as Covid-19 lockdowns in China and geopolitical tensions.
Paris, Frankfurt and London all sank sharply at the open after Russia's energy giant Gazprom said it would not restart gas supplies to Europe, citing problems with a pipeline.
The announcement came the same day as the Group of Seven of industrialized nations said they would work to quickly implement a price cap on Russian oil exports, a move that would starve the Kremlin of critical revenue for its war effort.
The news ramped up an energy crisis in the continent caused by sanctions on Moscow for invading Ukraine on February 24.
delivered to your inbox
It has sent shockwaves through the eurozone economy and fanned expectations it would sink into a recession, while sending the euro tanking to a 20-year low against the dollar. The single currency hit a nadir of $0.9878 at one point.
"Russia's ongoing weaponization of energy supplies continues to increase downside risks for European economies and the euro," said Lee Hardman, currency analyst at financial services group MUFG.
The issue has given the European Central Bank (ECB) a huge headache. It is forced to lift interest rates as it struggles to contain runaway inflation.
Policymakers are due to announce a second straight lift at its meeting this week, with some observers betting on a 0.75-percentage-point hike.
"The outlook is poor for Europe. It started to get choppy at the tail end of last week, and it is almost certainly going to get worse," Gordon Shannon of TwentyFour Asset Management said. "The ECB had only just started to catch up with the Fed (Federal Reserve) in terms of hiking rates, but if we are going into a prolonged recession, I think this slows down their attempts."
The move offset a broadly positive payrolls report showing US employment growth moderating and unemployment ticking higher, easing pressure on the American central bank to sharply lift interest rates.
In response to the figures, traders lowered their expectations for a third successive three-quarter-point hike this month, with many now predicting 50 basis points.
"The increase in the participation rate and a softening in average hourly earnings may be a tentative sign that intense labor market tightness is starting to ease slightly," National Australia Bank's Tapas Strickland said.
He added that it "eases some of the fears stemming from other indicators such as job openings. Markets interpreted the print as lessening the chances of a 75-basis-point hike."
Still, the dollar continued to strengthen across the board, holding above 140 yen — a 24-year high — while the pound was on its way to hitting levels not seen since 1985.
However, all three main indexes in New York reversed their gains after the Gazprom announcement.
And in Asia on Monday, Hong Kong was the biggest loser, with technology firms hit by reports that Washington was considering imposing fresh limits on investments in Chinese firms.
Tokyo, Seoul, Taipei, Manila, Bangkok and Wellington also fell, but there were gains in Shanghai, Sydney, Mumbai, Singapore and Jakarta.
Gazprom's move helped lift oil prices Monday, with buying also supported by talk that members of the Organization of the Petroleum Exporting Countries and their partners are considering cutting output at their meeting on Monday.
Investors were also dealing with more bad news out of China, where tens of millions of people across several cities were put under lockdown as part of officials' zero-Covid strategy.
The measures follow an extended shutdown in Shanghai earlier in the year that battered the world's second-largest economy.
Observers said Chinese authorities were unlikely to budge ahead of a key Communist Party meeting in October, where President Xi Jinping is expected to be handed a third five-year term.
"Following this, it is unclear whether China will start to pivot away from its zero-Covid policy," Strickland said. "For as long as the policy exists, any stimulus measures are unlikely to gain traction, amid a challenging time for the Chinese property market and the economy in general."