The market is closed today as investors recover from a tough Friday session. The Dow, S&P, and Nasdaq Composite all fell last week, starting September off on the wrong foot after Russian gas giant Gazprom surprised the market with a gas shutoff to Europe via Nord Stream 1.
Gazprom claimed that flows had to be stopped to repair a leak in the liquefied natural gas pipeline. In reality, though, it was likely just another strategic move from Putin in the ongoing NATO/Russia game of “energy chicken.”
The first one to blink (or shut the lights off) loses.
The Gazprom headline proved too difficult for the market to stomach, and it ruined an otherwise bullish morning trading session following the release of a middle-of-the-road August jobs report.
But things aren’t to get any easier this week with several major events set to take place. The IHS-Markit services PMI for August comes out tomorrow morning shortly after the market opens as does the ISM Services PMI. Both reports are expected to read higher than they would during a recession, which should be received as bearish (good news is still bad news, after all) with rate hikes approaching from the European Central Bank (Thursday) and Federal Reserve (Friday) at the end of the week.
Prior to Fed Chairman Jerome Powell’s speech from Jackson Hole, the market thought the Fed would raise rates by 50 basis points this Friday. Now, however, a 75 basis point increase has been priced-in. The ECB is expected to raise rates by 75 basis points as well.
And, if Powell announces a 75 basis point hike this Friday, investors will be watching his post-hike speech closely for clues as to what comes next as the market lingers under significant technical resistance.
“There’s still a lot of nervousness around what we’ll see over the next few months,” said eToro analyst Callie Cox.
“Yes, inflation and the job market are coming back into balance, but at what cost? Markets are still figuring that out. To make matters worse, the S&P 500 is trapped in the danger zone – below its three big moving averages. Those moving averages served as floors up until a few weeks ago. Now, they seem to be ceilings that the index just can’t bust through. The mood has definitely changed. While we may not test the lows of this sell-off again, we also may not reach new highs any time soon.”
Cox is mostly right but she may be underestimating how much lower stocks will go before a bottom is reached. Over the last few days, the energy crisis in Europe has gone from bad to worse as numerous energy companies asked for bailouts. Natural gas futures are soaring once more after mercifully falling through the end of August.
Germany then announced this morning that it would shutter the majority of its nuclear plants while maintaining only two for “emergency purposes.”
German Economy Minister Robert Habeck said at an electricity security conference that “we must expect the worst.” Outages and sky-high electricity bills already threaten most Germans. The situation should only grow more dire as winter approaches, which has led to firewood hoarding across the country.
Europe’s energy woes, while more immediately dangerous to European equities, also pose a threat to US stocks. Approximately $2 trillion worth of German value is dependent upon $20 billion worth of Russian gas to maintain its value. That’s 100x leverage, dwarfing Lehman’s 30-to-1 leverage when the company imploded. A Euro stock collapse would drag US equities lower, too.
Long-term and short-term, there’s plenty to be fearful of. And that’s probably why the market will, at the very least, test the June lows (if not lower lows) as the European energy crisis starts to boil over.
